-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Lbc5ou7fokxvLLHlOQo6oE3eAzbMbJQ3X3OJ6AdnNMtaISWV1ZK+qc8sTGgVJ4Wt hATcIE8A1MWNofoYyM85Ew== 0000002648-95-000027.txt : 19950731 0000002648-95-000027.hdr.sgml : 19950731 ACCESSION NUMBER: 0000002648-95-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950728 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AETNA LIFE & CASUALTY CO CENTRAL INDEX KEY: 0000002648 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 060843808 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05704 FILM NUMBER: 95556812 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 2032730123 MAIL ADDRESS: STREET 1: 151 FARMINGTON AVE STREET 2: FINANCIAL YF8H CITY PLACE CITY: HARTFORD STATE: CT ZIP: 06156 10-Q 1 2Q 1995 LIVE FILING 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1995 _______________ Commission file number 1-5704 ________ Aetna Life and Casualty Company ___________________________________________________________________________ (Exact name of registrant as specified in its charter) Connecticut 06-0843808 ___________________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 151 Farmington Avenue, Hartford, Connecticut 06156 ___________________________________________________________________________ (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code (203) 273-0123 ______________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding Title of Class at June 30, 1995 ________________ __________________ Common Capital Stock 113,219,998 without par value 2 TABLE OF CONTENTS _________________ Page ____ PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Shareholders' Equity 6 Consolidated Statements of Cash Flows 7 Condensed Notes to Financial Statements 8 Independent Auditors' Review Report 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 52 Item 4. Submission of Matters to a Vote of Security Holders. 52 Item 5. Other Information. 53 Item 6. Exhibits and Reports on Form 8-K. 54 Signatures 55 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended June 30, June 30, ________________________ ___________________________ (Millions, except share and per share data) 1995 1994 1995 1994 ____ ____ ____ ____ Revenue: Premiums.................................. $ 2,825.7 $ 2,839.0 $ 5,754.7 $ 5,581.3 Net investment income..................... 1,140.6 1,121.0 2,226.5 2,247.5 Fees and other income..................... 506.7 465.8 982.7 926.4 Net realized capital losses............... (25.9) (13.4) (32.3) (19.3) ___________ ___________ ___________ ___________ Total revenue......................... 4,447.1 4,412.4 8,931.6 8,735.9 ___________ ___________ ___________ ___________ Benefits and expenses: Current and future benefits............... 3,767.4 3,114.5 6,889.8 6,232.1 Operating expenses........................ 962.0 924.5 1,897.0 1,882.0 Amortization of deferred policy acquisition costs....................... 196.6 185.2 383.8 377.2 ___________ ___________ ___________ ___________ Total benefits and expenses........... 4,926.0 4,224.2 9,170.6 8,491.3 ___________ ___________ ___________ ___________ Income(Loss) before income taxes............ (478.9) 188.2 (239.0) 244.6 Federal and foreign income taxes (benefits): Current................................... (7.2) (27.9) (26.4) (25.6) Deferred.................................. (174.8) 83.7 (76.5) 92.1 ___________ ___________ ___________ ___________ Total federal and foreign income taxes (benefits).......................... (182.0) 55.8 (102.9) 66.5 ___________ ___________ ___________ ___________ Net income(loss)...................... $ (296.9) $ 132.4 $ (136.1) $ 178.1 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Results per common share: Net income(loss)............................ $ (2.62) $ 1.17 $ (1.20) $ 1.58 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Dividends declared.......................... $ .69 $ .69 $ 1.38 $ 1.38 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Weighted average common shares outstanding............................... 113,033,255 112,904,466 112,871,537 112,956,551 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ See Condensed Notes to Financial Statements.
4 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, (Millions) 1995 1994 _____________ ____________ Assets: Investments: Debt securities: Held for investment, at amortized cost (fair value $1,823.8 and $1,991.2)....................... $ 1,786.4 $ 2,000.8 Available for sale, at fair value (amortized cost $38,438.5 and $36,984.2)...................... 39,583.4 35,110.7 Equity securities, at fair value (cost $1,152.8 and $1,326.9)....... 1,585.8 1,655.6 Short-term investments.............. 520.2 450.4 Mortgage loans...................... 10,802.6 11,843.6 Real estate......................... 1,618.7 1,545.7 Policy loans........................ 571.0 533.8 Other............................... 1,215.2 1,152.7 ___________ __________ Total investments............... 57,683.3 54,293.3 Cash and cash equivalents............. 2,151.0 2,953.6 Reinsurance recoverables and receivables.......................... 5,307.2 5,011.0 Accrued investment income............. 759.0 777.2 Premiums due and other receivables.... 1,827.9 1,722.9 Federal and foreign income taxes: Current............................. 151.3 18.3 Deferred............................ 1,125.1 1,266.7 Deferred policy acquisition costs..... 2,126.9 2,014.7 Other assets.......................... 2,054.2 1,992.2 Separate Accounts assets.............. 26,683.1 24,122.6 ___________ __________ Total assets.................... $ 99,869.0 $ 94,172.5 ___________ __________ ___________ __________ See Condensed Notes to Financial Statements.
5 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
June 30, December 31, (Millions, except share and per share data) 1995 1994 _____________ ____________ Liabilities: Future policy benefits........................ $ 17,803.1 $ 17,979.2 Unpaid claims and claim expenses.............. 18,242.7 17,478.3 Unearned premiums............................. 1,641.4 1,604.9 Policyholders' funds left with the company.... 23,875.1 23,223.1 __________ __________ Total insurance reserve liabilities....... 61,562.3 60,285.5 Dividends payable to shareholders............. 78.1 77.7 Short-term debt............................... 60.4 23.9 Long-term debt................................ 1,117.9 1,114.7 Other liabilities............................. 3,393.2 2,718.6 Participating policyholders' interests........ 189.7 170.5 Separate Accounts liabilities................. 26,539.4 24,003.6 __________ __________ Total liabilities......................... 92,941.0 88,394.5 __________ __________ Minority interest in preferred securities of subsidiary.................................. 275.0 275.0 __________ __________ Shareholders' Equity: Class A Voting Preferred Stock (no par value; 10,000,000 shares authorized; no shares issued or outstanding)............. - - Class B Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding)............. - - Class C Non-Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding)............. - - Common Capital Stock (no par value; 250,000,000 shares authorized; 114,939,275 issued; and 113,219,998 and 112,657,758 outstanding)................. 1,415.9 1,419.2 Net unrealized capital gains (losses)......... 344.6 (1,071.5) Retained earnings............................. 4,967.1 5,259.6 Treasury stock, at cost (1,719,277 and 2,281,517 shares)............................ (74.6) (104.3) __________ __________ Total shareholders' equity................ 6,653.0 5,503.0 __________ __________ Total liabilities, minority interest and shareholders' equity................. $ 99,869.0 $ 94,172.5 __________ __________ __________ __________ Shareholders' equity per common share......... $ 58.76 $ 48.85 __________ __________ __________ __________ See Condensed Notes to Financial Statements.
6 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Millions, except share data) Net Common Unrealized Capital Capital Retained Treasury Six Months Ended June 30, 1995 Total Stock Gains (Losses) Earnings Stock __________________________________________________________________________________________________________ Balances at December 31, 1994 $ 5,503.0 $ 1,419.2 $(1,071.5) $ 5,259.6 $ (104.3) __________________________________________________________________________________________________________ Net loss.............................. (136.1) (136.1) Net change in unrealized capital gains and losses.......................... 1,416.1 1,416.1 Common stock issued for benefit plans (562,240 shares)...................... 29.7 29.7 Loss on issuance of treasury stock.... (3.3) (3.3) Common stock dividends declared....... (156.4) (156.4) ____________________________________________________________________ Balances at June 30, 1995 $ 6,653.0 $ 1,415.9 $ 344.6 $ 4,967.1 $ (74.6) __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ Six Months Ended June 30, 1994 __________________________________________________________________________________________________________ Balances at December 31, 1993 $ 7,043.1 $ 1,422.0 $ 648.2 $ 5,103.3 $ (130.4) __________________________________________________________________________________________________________ Net income............................ 178.1 178.1 Net change in unrealized capital gains and losses.......................... (1,035.7) (1,035.7) Common stock issued for benefit plans (417,602 shares)...................... 23.8 23.8 Loss on issuance of treasury stock.... (4.2) (4.2) Common stock dividends declared....... (155.7) (155.7) ____________________________________________________________________ Balances at June 30, 1994 $ 6,049.4 $ 1,417.8 $ (387.5) $ 5,125.7 $ (106.6) __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ See Condensed Notes to Financial Statements.
7 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, _________________________ (Millions) 1995 1994 ____ ____ Cash Flows from Operating Activities: Net income (loss)................................................. $ (136.1) $ 178.1 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Decrease (Increase) in accrued investment income............... 19.4 (.5) (Increase) Decrease in premiums due and other receivables...... (134.4) 153.1 Increase in reinsurance recoverables and receivables........... (288.7) (254.3) Increase in deferred policy acquisition costs.................. (83.5) (93.0) Depreciation and amortization.................................. 75.3 94.3 Increase in federal and foreign income taxes................... (1.0) (326.6) Net decrease in other assets and other liabilities............. (22.7) (692.3) Increase in insurance reserve liabilities...................... 910.7 755.9 Net sales of debt trading securities........................... - 52.3 Decrease (Increase) in minority interest....................... 4.1 (22.7) Net realized capital losses.................................... 32.3 19.3 Amortization of net investment discount........................ (51.7) (51.8) Other, net..................................................... (64.9) 18.2 _________ _________ Net cash provided by (used for) operating activities......... 258.8 (170.0) _________ _________ Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale............................. 8,596.8 12,258.8 Debt securities held for investment............................ - 5.6 Equity securities.............................................. 768.4 398.9 Mortgage loans................................................. 81.2 67.4 Real estate.................................................... 155.5 316.6 Short-term investments......................................... 30,074.0 30,322.7 Investment repayments of: Debt securities available for sale............................. 1,041.3 2,125.8 Debt securities held for investment............................ 176.2 330.7 Mortgage loans................................................. 936.6 1,107.8 Cost of investments in: Debt securities available for sale............................. (10,937.4) (14,799.0) Debt securities held for investment............................ (7.2) (46.3) Equity securities.............................................. (348.4) (493.6) Mortgage loans................................................. (95.6) (159.7) Real estate.................................................... (83.5) (20.1) Short-term investments......................................... (30,141.0) (30,444.4) Increase in property, plant & equipment........................... (82.9) (65.5) Net (increase) decrease in Separate Accounts...................... (24.8) 4.7 Other, net........................................................ (126.9) 127.5 _________ _________ Net cash (used for) provided by investing activities............ (17.7) 1,037.9 _________ _________ Cash Flows from Financing Activities: Deposits and interest credited for investment contracts........... 373.2 1,757.9 Withdrawals of investment contracts............................... (1,367.9) (2,342.6) Issuance of long-term debt........................................ 3.8 65.5 Stock issued under benefit plans.................................. 26.4 19.6 Repayment of long-term debt....................................... (1.8) (93.0) Net increase in short-term debt................................... 35.6 138.4 Dividends paid to shareholders.................................... (156.4) (155.7) _________ _________ Net cash used for financing activities.......................... (1,087.1) (609.9) _________ _________ Effect of exchange rate changes on cash and cash equivalents....................................................... 43.4 (3.6) _________ _________ Net (decrease) increase in cash and cash equivalents................. (802.6) 254.4 Cash and cash equivalents, beginning of period....................... 2,953.6 1,557.8 _________ _________ Cash and cash equivalents, end of period............................. $ 2,151.0 $ 1,812.2 _________ _________ _________ _________ Supplemental Cash Flow Information: Interest paid..................................................... $ 53.6 $ 37.7 _________ _________ _________ _________ Income taxes paid................................................. $ 81.3 $ 18.0 _________ _________ _________ _________ See Condensed Notes to Financial Statements.
8 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (1) Basis of Presentation The consolidated financial statements include Aetna Life and Casualty Company and its majority-owned subsidiaries (collectively, the "company"). Less than majority-owned entities in which the company has at least a 20% interest are reported on the equity basis. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles and are unaudited. Certain reclassifications have been made to 1994 financial information to conform to 1995 presentation. These interim statements necessarily rely heavily on estimates, including assumptions as to annualized tax rates. In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made. All such adjustments are of a normal, recurring nature. (2) Future Application of Accounting Standards In March 1995, the Financial Accounting Standards Board issued Financial Accounting Standard ("FAS") No. 121, Accounting for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement requires write down to fair value when long-lived assets to be held and used are impaired. The statement also requires long-lived assets to be disposed of (e.g., real estate held for sale) to be carried at the lower of cost or fair value less cost to sell and does not allow such assets to be depreciated. This statement will be effective for 1996 financial statements, although earlier adoption is permissible. The company has not yet determined the timing of adoption of this statement, however, the impact on earnings is not expected to be material. (3) Insurance Liabilities Workers' compensation life table indemnity reserves are discounted at 5% for voluntary business and 3.5% for involuntary business, with mortality assumptions that reflect current company and industry experience. Workers' compensation life table indemnity reserves totaled $753 million at June 30, 1995, which was 22% of the total workers' compensation reserves for unpaid claims and claim adjustment expenses. Certain other property-casualty reserves with fixed and determinable payment patterns have been discounted at risk free rates. The aggregate amount of such discount was approximately $20 million at June 30, 1995. (4) Discontinued Products Results of discontinued fully guaranteed large case pension products (guaranteed investment contracts ("GICs") and single- premium annuities ("SPAs")) for the three and six months ended June 30, 1995 and 1994 were charged to the reserve for anticipated future losses and did not affect the company's results of operations. 9 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Discontinued Products (Continued) Future losses (including capital losses) for each product will be charged to the respective reserve at the time such losses are realized. Management believes the reserve for anticipated losses at June 30, 1995 is adequate to provide for future losses associated with these products. To the extent that actual future losses differ from anticipated future losses, the company's results of operations would be affected. (Please refer to the company's 1994 Annual Report to Shareholders for a more complete discussion of the reserve for anticipated future losses on discontinued products.) Results of discontinued products were as follows (pretax, in millions):
(Added to) Charged to Guaranteed Single- Reserve for Investment Premium Future Three months ended June 30, 1995 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Net investment income $ 138.3 $ 112.2 $ 250.5 $ - $ 250.5 Net realized capital gains (losses) (12.6) 14.4 1.8 (1.8) - Interest earned on receivable from continuing business 5.1 7.6 12.7 - 12.7 Other income 2.4 3.0 5.4 - 5.4 _____________________________________________________________ Total revenue 133.2 137.2 270.4 (1.8) 268.6 _____________________________________________________________ Current and future benefits 145.1 113.2 258.3 4.4 262.7 Operating expenses 1.9 4.0 5.9 - 5.9 _____________________________________________________________ Total benefits and expenses 147.0 117.2 264.2 4.4 268.6 _____________________________________________________________ Results of discontinued products $ (13.8) $ 20.0 $ 6.2 $ (6.2) $ - _____________________________________________________________________________________________________ _____________________________________________________________ (Added to) Charged to Guaranteed Single- Reserve for Investment Premium Future Three months ended June 30, 1994 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Premiums $ - $ 5.5 $ 5.5 $ - $ 5.5 Net investment income 156.5 106.9 263.4 - 263.4 Net realized capital losses (31.6) (10.9) (42.5) 42.5 - Interest earned on receivable from continuing business 4.9 6.9 11.8 - 11.8 Other income 3.6 3.6 7.2 - 7.2 _____________________________________________________________ Total revenue 133.4 112.0 245.4 42.5 287.9 _____________________________________________________________ Current and future benefits 190.1 112.6 302.7 (15.8) 286.9 Operating expenses .3 .7 1.0 - 1.0 _____________________________________________________________ Total benefits and expenses 190.4 113.3 303.7 (15.8) 287.9 _____________________________________________________________ Results of discontinued products $ (57.0) $ (1.3) $ (58.3) $ 58.3 $ - _____________________________________________________________________________________________________ _____________________________________________________________ * Amounts are reflected in the 1995 and 1994 Consolidated Statements of Income, except for interest of $12.7 million and $11.8 million for the three months ended June 30, 1995 and 1994, respectively, earned on the receivable from continuing business which is eliminated in consolidation.
10 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Discontinued Products (Continued)
(Added to) Charged to Guaranteed Single- Reserve for Investment Premium Future Six months ended June 30, 1995 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Net investment income $ 270.6 $ 222.3 $ 492.9 $ - $ 492.9 Net realized capital gains (losses) (31.1) 22.4 (8.7) 8.7 - Interest earned on receivable from continuing business 10.2 15.2 25.4 - 25.4 Other income 4.9 6.0 10.9 - 10.9 _____________________________________________________________ Total revenue 254.6 265.9 520.5 8.7 529.2 _____________________________________________________________ Current and future benefits 300.3 227.6 527.9 (5.8) 522.1 Operating expenses 1.6 5.5 7.1 - 7.1 _____________________________________________________________ Total benefits and expenses 301.9 233.1 535.0 (5.8) 529.2 _____________________________________________________________ Results of discontinued products $ (47.3) $ 32.8 $ (14.5) $ 14.5 $ - _____________________________________________________________________________________________________ _____________________________________________________________ (Added to) Charged to Guaranteed Single- Reserve for Investment Premium Future Six months ended June 30, 1994 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Premiums $ - $ 44.7 $ 44.7 $ - $ 44.7 Net investment income 327.5 215.8 543.3 - 543.3 Net realized capital losses (57.1) (26.4) (83.5) 83.5 - Interest earned on receivable from continuing business 9.6 13.8 23.4 - 23.4 Other income 6.5 6.4 12.9 - 12.9 _____________________________________________________________ Total revenue 286.5 254.3 540.8 83.5 624.3 _____________________________________________________________ Current and future benefits 392.7 263.9 656.6 (36.4) 620.2 Operating expenses 2.2 1.9 4.1 - 4.1 _____________________________________________________________ Total benefits and expenses 394.9 265.8 660.7 (36.4) 624.3 _____________________________________________________________ Results of discontinued products $ (108.4) $ (11.5) $ (119.9) $ 119.9 $ - _____________________________________________________________________________________________________ _____________________________________________________________ * Amounts are reflected in the 1995 and 1994 Consolidated Statements of Income, except for interest of $25.4 million and $23.4 million for the six months ended June 30, 1995 and 1994, respectively, earned on the receivable from continuing business which is eliminated in consolidation.
Deposits of $7.0 million and $34.3 million for the three months ended June 30, 1995 and 1994, respectively, and $16.8 million and $168.5 million were received for the six months ended June 30, 1995 and 1994, respectively, under pre-existing GIC contracts. In accordance with FAS No. 97, such deposits are not included in premiums or revenue. 11 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Discontinued Products (Continued) Assets and liabilities of discontinued products were as follows (in millions):
June 30, 1995 _______________________________________ Guaranteed Single- Investment Premium Contracts Annuities Total _______________________________________ Debt securities available for sale $ 2,658.4 $ 3,462.3 $ 6,120.7 Mortgage loans 2,577.4 1,448.4 4,025.8 Real estate 524.1 176.6 700.7 Short-term and other investments 271.5 146.6 418.1 _______________________________________ Total investments 6,031.4 5,233.9 11,265.3 Current and deferred income taxes 233.1 136.1 369.2 Receivable from continuing business 419.6 478.3 897.9 Other - 101.6 101.6 _______________________________________ Total assets $ 6,684.1 $ 5,949.9 $12,634.0 ______________________________________________________________________________ ______________________________________________________________________________ Future policy benefits $ - $ 4,981.7 $ 4,981.7 Policyholders' funds left with the company 6,223.0 - 6,223.0 Reserve for future losses on discontinued products 298.3 684.2 982.5 Other 162.8 284.0 446.8 _______________________________________ Total liabilities $ 6,684.1 $ 5,949.9 $12,634.0 ______________________________________________________________________________ ______________________________________________________________________________
Net unrealized capital gains as of June 30, 1995 on available for sale debt securities are included above in other liabilities and are not reflected in consolidated shareholders' equity. The reserve for anticipated future losses on GICs is included in policyholders' funds left with the company and the reserve for anticipated future losses on SPAs is included in future policy benefits on the Consolidated Balance Sheet. At June 30, 1995, estimated future after-tax realized capital losses of approximately $116 million ($179 million, pretax), attributable to mortgage loans and real estate supporting GICs, and $39 million ($60 million, pretax), attributable to mortgage loans and real estate supporting SPAs were expected to be charged to the reserve for future losses. Included in the $(31.1) million and $22.4 million of net realized capital (losses) gains (pretax) on GICs and SPAs, respectively, for the six months ended June 30, 1995 are (losses) gains from the sale of bonds of $(13.8) million and $35.5 million, respectively. 12 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Discontinued Products (Continued) The activity in the reserve for anticipated future losses on discontinued products was as follows (pretax, in millions):
6 Months Ended June 30, 1995 ___________________________________ Guaranteed Single- Investment Premium Contracts Annuities Total _________________________________________________________________________ Reserve at beginning of period $ 345.6 $ 651.4 $ 997.0 Gain (Loss) on discontinued products (47.3) 32.8 (14.5) ___________________________________ Reserve at end of period $ 298.3 $ 684.2 $ 982.5 _________________________________________________________________________ ___________________________________
At the time of discontinuance, a receivable from continuing products was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables will be funded from invested assets supporting Large Case Pensions and accrue interest at the discount rates used to calculate the loss on discontinuance until the receivable is funded. The offsetting payable established in continuing products will similarly accrue interest, generally offsetting the investment income on the assets available to fund the shortfalls. These amounts are eliminated in consolidation and are therefore not reflected on the Consolidated Balance Sheet. At June 30, 1995 no funding had taken place. The activity in the receivable from continuing business was as follows (pretax, in millions):
6 Months Ended June 30, 1995 ___________________________________ Guaranteed Single- Investment Premium Contracts Annuities Total ____________________________________________________________________________ Receivable at beginning of period $ 409.4 $ 463.1 $ 872.5 Interest earned 10.2 15.2 25.4 ___________________________________ Receivable at end of period $ 419.6 $ 478.3 $ 897.9 ____________________________________________________________________________ ___________________________________
Pursuant to a segmentation plan approved in 1983 by the New York Insurance Department, the combined assets supporting discontinued products were segregated coincident with the receipt of premiums and deposits on the discontinued products. Assets of the discontinued products were distinguished physically, operationally and for financial reporting purposes, from the remaining assets of the company. Management believes the timing and amount of cash flows with respect to the discontinued products have been estimated with reasonable accuracy, and the financial statements reflect management's best estimate of the most likely cash flows that will occur. However, future periods may include a charge or benefit equal to the present value of the differences, if any, between future projected cash flows and current estimates. 13 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Intent to Sell Subsidiary As of June 30, 1995, the company intends to sell its subsidiary, Aetna Re-Insurance Company (U.K.) Ltd., and accordingly, the subsidiary has been written down to estimated fair market value. A realized capital loss of $22.5 million (after-tax) is included in net realized capital losses in the Consolidated Statements of Income for the three and six months ended June 30, 1995. (6) Investments Net investment income includes amounts allocable to experience rated contractholders of $367.9 million and $368.9 million for the three months ended June 30, 1995 and 1994, respectively, and $728.7 million and $729.8 million for the six months ended June 30, 1995 and 1994, respectively. Interest credited to contractholders is included in current and future benefits. Net realized capital gains (losses) allocable to experience rated contractholders of $30.1 million and $(37.7) million for the three months ended June 30, 1995 and 1994, respectively, and $7.3 million and $(71.6) million for the six months ended June 30, 1995 and 1994, respectively, were deducted from net realized capital losses reflected on the Consolidated Statements of Income, and an offsetting amount is reflected on the Consolidated Balance Sheets in policyholders' funds left with the company. As of January 1, 1995, the company adopted FAS No. 114, Accounting by Creditors for Impairment of a Loan and FAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. In accordance with these standards, a loan is considered impaired when it is probable that the company will be unable to collect amounts due according to the contractual terms of the loan agreement. For impaired loans, a specific impairment reserve is established for the difference between the recorded investment in the mortgage loan and the fair value of the collateral. General reserves are established for losses management believes are likely to arise from the overall portfolio but cannot be attributed to specific loans. Prior to the adoption of FAS Nos. 114 and 118, the company included the reserve for estimated losses on potential problem loans (other than those allocable to experience rated products) which management believed were likely to become classified as problem or restructured in the next 12 months or so in the general reserve. At June 30, 1995, the total recorded investment in loans that are considered to be impaired (which include problem loans, restructured loans and potential problem loans) under FAS No. 114 and related specific reserves are presented in the table below. Included in the total recorded investment are impaired loans of $443 million for which no specific reserves are considered necessary. 14 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Investments (continued)
Total Recorded Specific (Millions) Investment Reserves _________________________________________________________________________ Supporting discontinued products $ 979.5 $ 239.8 Supporting experience rated products 753.2 201.7 Supporting remaining products 650.1 163.2 ___________________________ Total Impaired Loans $ 2,382.8 $ 604.7 _________________________________________________________________________ ___________________________
The activity in the specific and general reserves as of June 30, 1995 is summarized below:
General Reserve Allocated to Charged Balance Balance at Experience Balance at to net Charged at December 31, 1994 Rated December 31, 1994, realized to other Principal June 30, (Millions) as reported Products (1) as adjusted loss accounts Write-offs 1995 ___________________________________________________________________________________________________________ Supporting discontinued products $ 372.1 $ - $ 372.1 $ - $ 25.1 (2) $ (70.0) $ 327.2 Supporting experience rated products 156.1 208.5 364.6 - 7.4 (2) (40.5) 331.5 Supporting remaining products 255.9 - 255.9 8.8 - (20.8) 243.9 ______________________________________________________________________________________________ Total $ 784.1 $ 208.5 $ 992.6 $ 8.8 $ 32.5 $ (131.3) $ 902.6 ___________________________________________________________________________________________________________ ______________________________________________________________________________________________ Specific Reserves $ 434.1 $ - $ 434.1 $ 7.9 $ 294.0 (3) $ (131.3) $ 604.7 General Reserve 350.0 208.5 558.5 0.9 (261.5)(3) - 297.9 ______________________________________________________________________________________________ Total $ 784.1 $ 208.5 $ 992.6 $ 8.8 $ 32.5 $ (131.3) $ 902.6 ___________________________________________________________________________________________________________ ______________________________________________________________________________________________ (1) The general reserve at December 31, 1994 excluded reserves of $208.5 million related to experience rated products. (2) Reflects additions to reserves related to assets supporting experience rated products and discontinued products which do not affect the company's results of operations. (3) $261.5 million of general reserve related to performing loans at December 31, 1994 were reclassified to specific reserves as a result of the adoption of FAS No. 114.
15 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Investments (Continued) The company accrues interest income on impaired loans to the extent it is deemed collectible and the loan continues to perform under its original or restructured contractual terms. Interest income on problem loans is generally recognized on a cash basis. Cash payments on loans in the process of foreclosure are generally treated as a return of principal. Income earned (pretax) and received on the average recorded investment in impaired loans for the three and six months ended June 30, 1995, was as follows:
Three Months Ended June 30, 1995 Six Months Ended June 30, 1995 ________________________________ ______________________________ Average Average Impaired Income Income Impaired Income Income (Millions) Loans Earned Received Loans Earned Received _______________________________________________________________________________________________________ Supporting discontinued products $ 1,009.5 $ 21.3 $ 21.7 $ 1,011.8 $ 39.7 $ 39.2 Supporting experience rated products 734.5 13.2 13.7 741.0 26.2 26.6 Supporting remaining products 673.1 9.2 9.3 668.0 17.5 18.1 _________________________________________________________________ Total $ 2,417.1 $ 43.7 $ 44.7 $ 2,420.8 $ 83.4 $ 83.9 _______________________________________________________________________________________________________ _________________________________________________________________
(7) Federal and Foreign Income Taxes Net unrealized capital gains and losses are presented in shareholders' equity net of deferred taxes. During the six months ended June 30, 1995, the company moved from a net unrealized capital loss position of $1,071.5 million at December 31, 1994, to a net unrealized capital gain position of $344.6 million at June 30, 1995, primarily due to decreases in interest rates. As a result, all valuation allowances previously established related to deferred tax assets on these capital losses were reversed, which had no impact on net income for the three and six months ended June 30, 1995. (8) Reinsurance Ceded earned premiums were $.2 billion and $.3 billion for the three months ended June 30, 1995 and 1994, respectively, and $.5 billion and $.6 billion for the six months ended June 30, 1995 and 1994, respectively. Ceded current and future benefits were $.3 billion for the three months ended June 30, 1995 and 1994 and $.6 billion and $.7 billion for the six months ended June 30, 1995 and 1994, respectively. 16 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (9) Debt The company has credit facilities aggregating $1 billion with a group of worldwide banks. One $500 million facility terminates in July 1999. Another $500 million facility was scheduled to expire in July 1995, however, the company extended the maturity of this credit facility to July 1996. Various interest rate options are available under each facility and any borrowings mature on the expiration date of the applicable credit commitment. The company pays facility fees ranging from .08% to .375% per annum under the short-term credit agreement and from .1% to .5% per annum under the medium-term credit agreement, depending upon the company's long-term senior unsecured debt rating. The commitments require the company to maintain shareholders' equity, excluding net unrealized capital gains and losses, of at least $5.0 billion. These facilities also support the company's commercial paper borrowing program. Pursuant to shelf registration statements declared effective by the Securities and Exchange Commission ("SEC") the company may offer and sell up to an additional $550 million of various types of securities. A subsidiary of the company may offer and sell up to an additional $225 million of preferred securities under a shelf registration statement declared effective by the SEC. 17 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (10) Off-Balance-Sheet Financial Instruments (Including Derivative Financial Instruments) The company engages in hedging activities to manage foreign exchange and interest rate risk. Such hedging activities have principally consisted of using off-balance-sheet instruments including foreign exchange forward contracts, futures and forward contracts, and interest rate swap agreements. (Please see General Account Investments - Use of Derivatives and Other Investments on pages 41 and 42 of the Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 18 of the company's 1994 Annual Report to Shareholders for a description of the company's hedging activities). The notional amounts, carrying values and estimated fair values of the company's off-balance- sheet financial instruments are as follows (in millions):
Carrying Value Notional Asset Fair June 30, 1995 Amount (Liability) Value _______________________________________________________________________________ Foreign exchange forward contracts - sell: Related to net investments in foreign affiliates $ 229.1 $ (4.1) $ (6.3) Related to investments in non-dollar denominated assets 205.0 (1.1) (1.1) Foreign exchange forward contracts - buy: Related to net investments in foreign affiliates 29.9 6.2 4.1 Related to investments in non-dollar denominated assets 25.2 .4 .4 Futures contracts to purchase investments 95.4 .2 (.2) Futures contracts to sell investments 133.0 - - Interest rate swaps: Unrecognized gains 423.0 - 22.3 Unrecognized losses 380.0 - (14.2) Forward swap agreement 100.0 - .2 Carrying Value Notional Asset Fair December 31, 1994 Amount (Liability) Value _______________________________________________________________________________ Foreign exchange forward contracts - sell: Related to net investments in foreign affiliates $ 497.8 $ (2.5) $ (4.7) Related to investments in non-dollar denominated assets 266.9 (.8) (1.6) Foreign exchange forward contracts - buy: Related to net investments in foreign affiliates 48.5 5.2 4.8 Related to investments in non-dollar denominated assets 40.9 .1 .2 Futures contracts to purchase investments 122.5 (.1) .1 Forward contracts to purchase investments 5.6 - - Interest rate swaps: Unrecognized gains 429.4 - 20.7 Unrecognized losses 386.4 - (18.3)
18 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (11) Supplemental Cash Flow Information Significant non-cash investing and financing activities include acquisition of real estate through foreclosures (including in- substance foreclosures) of mortgage loans amounting to $144 million and $149 million for the six months ended June 30, 1995 and 1994, respectively. (12) Earnings Per Share Earnings per share are computed using net income divided by the weighted average number of common shares outstanding, (including common share equivalents in 1994). There is not a significant difference between primary and fully diluted earnings per share. (13) Commitments and Contingent Liabilities Environmental and Asbestos-Related Claims Reserving for environmental and asbestos-related claims is subject to significant uncertainties. However, in recent years, developments have occurred inside and outside of the company which have enabled the company to continue to better estimate environmental liabilities. These developments led the company to initiate a comprehensive environmental reserving review in early 1995 which was concluded at the end of the second quarter of 1995. Upon completing its reserving review, the company added $750 million (pretax)($487.5 million, after-tax) to environmental-related claims reserves in the second quarter of 1995, resulting in a total reserve for environmental-related liabilities of $1,187 million, before reinsurance of $100 million (net of an allowance of $16 million for reinsurance considered to be uncollectible) and net of discount on environmental settlements, at June 30, 1995. In the opinion of management, the company's reserves for environmental-related claims at June 30, 1995 represent the company's best estimate of its ultimate environmental-related liability, based on currently known facts, current law (including Superfund), current technology, and assumptions considered reasonable where facts are not known. Due to the significant uncertainties and related management judgment involved in estimating the company's environmental liability, no assurances can be given that the environmental reserve represents the amount that will ultimately be paid by the company for all environmental- related losses. The amount ultimately paid could differ materially from the company's currently recorded reserve as legal and factual issues are clarified, but any difference cannot be reasonably estimated at this time. 19 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (13) Commitments and Contingent Liabilities (Continued) In addition, the company has purchased reinsurance protection which could be available to reduce the statutory surplus effects of additional environmental reserve development. The reinsurance provides aggregate protection of $335 million for adverse loss development beyond reserves held (net of existing reinsurance) at June 30, 1995 for environmental, asbestos, certain general liability and workers' compensation claims, occurring prior to January 1, 1995 ($6.9 billion). Under this arrangement, $165 million of the existing reserves for such losses have been ceded. This is a retroactive contract and the earnings benefits of any future recoveries arising under this arrangement would be accounted for as such under FAS No. 113 (i.e., at a discounted value). Because of the length of time between the recording of any reinsurance recoverable and its ultimate payment, the initial benefit of any recovery could be substantially less than the amount of reserve development. Environmental and asbestos-related loss and loss adjustment expense reserves, as reflected on the Consolidated Balance Sheet, were as follows (before reinsurance and net of discount on environmental settlements, in millions):
June 30, 1995 ___________________________________________________ Environmental Liability $ 1,187.0 Asbestos Bodily Injury 322.2 Asbestos Property Damage 23.0 __________ Total Environmental and Asbestos-Related Reserves $ 1,532.2 ___________________________________________________ __________
20 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (14) Litigation The company is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against itself, including lawsuits related to issues of policy coverage and judicial interpretation. One such area of coverage litigation involves legal liability for environmental and asbestos-related claims. These lawsuits and other factors make reserving for these claims subject to significant uncertainties. While the ultimate outcome of such litigation cannot be determined at this time, such litigation net of reserves established therefore and giving effect to reinsurance probable of recovery, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. 21 Independent Auditors' Review Report The Board of Directors Aetna Life and Casualty Company: We have reviewed the accompanying condensed consolidated balance sheet of Aetna Life and Casualty Company and Subsidiaries as of June 30, 1995, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 1995 and 1994, and the related condensed consolidated statements of shareholders' equity and cash flows for the six-month periods ended June 30, 1995 and 1994. These condensed consolidated financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Aetna Life and Casualty Company and Subsidiaries as of December 31, 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 7, 1995, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1994, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG PEAT MARWICK LLP Hartford, Connecticut July 27, 1995 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Results of Operations __________________________________
Operating Summary (Millions, except per share data) Three Months Ended June 30, Six Months Ended June 30, ________________________________ ________________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Premiums............................. $ 2,825.7 $ 2,839.0 (.5)% $ 5,754.7 $ 5,581.3 3.1% Net investment income................ 1,140.6 1,121.0 1.7 2,226.5 2,247.5 (.9) Fees and other income................ 506.7 465.8 8.8 982.7 926.4 6.1 Net realized capital losses.......... (25.9) (13.4) (93.3) (32.3) (19.3) (67.4) _________ _________ _________ _________ Total revenue.................... 4,447.1 4,412.4 .8 8,931.6 8,735.9 2.2 Current and future benefits.......... 3,767.4 3,114.5 21.0 6,889.8 6,232.1 10.6 Operating expenses................... 962.0 924.5 4.1 1,897.0 1,882.0 .8 Amortization of deferred policy acquisition costs................... 196.6 185.2 6.2 383.8 377.2 1.7 _________ _________ _________ _________ Total benefits and expenses...... 4,926.0 4,224.2 16.6 9,170.6 8,491.3 8.0 _________ _________ _________ _________ Income (loss) before income taxes.... (478.9) 188.2 - (239.0) 244.6 - Income taxes (benefits).............. (182.0) 55.8 - (102.9) 66.5 - _________ _________ _________ _________ Net income (loss)................ $ (296.9) $ 132.4 - $ (136.1) $ 178.1 - _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital losses, net of tax (included above)......... $ (12.5) $ (8.0) (56.3) $ (19.5) $ (15.5) (25.8) _________ _________ _________ _________ _________ _________ _________ _________ Net income (loss) per common share... $ (2.62) $ 1.17 - $ (1.20) $ 1.58 - _________ _________ _________ _________ _________ _________ _________ _________
Overview ________ The company reported net losses of $297 million and $136 million for the three and six months ended June 30, 1995, respectively, compared with net income of $132 million and $178 million for the same periods a year ago. The company's earnings (after-tax) adjusted for additions to environmental-related claims reserves (please see "Property-Casualty - Property-Casualty Reserves" on page 33) and net realized capital losses follow (in millions):
Three Months Ended June 30, Six Months Ended June 30, ___________________________ _________________________ 1995 1994 1995 1994 ____ ____ ____ ____ Net income (loss)............................ $(296.9) $ 132.4 $(136.1) $ 178.1 Less: Additions to environmental-related claims reserves......................... (487.5) (76.8) (505.7) (97.6) Net realized capital losses............... (12.5) (8.0) (19.5) (15.5) _______ _______ _______ _______ Adjusted earnings............................ $ 203.1 $ 217.2 $ 389.1 $ 291.2 _______ _______ _______ _______ _______ _______ _______ _______
The company's adjusted earnings decreased $14 million and increased $98 million for the three and six months ended June 30, 1995, respectively, as compared with the same periods in 1994. The following significant factors impact the comparison of adjusted earnings: Catastrophe losses (after-tax and net of reinsurance) for the three and six months ended June 30, 1995 were $25 million and $38 million, respectively, compared with $29 million and $153 million, respectively, for the same periods a year ago. Catastrophe losses for the six months ended June 30, 1994 related primarily to the Los Angeles earthquake and the severe winter weather. 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview (Continued) ____________________ Reductions of prior year loss reserves in the personal auto business of $54 million and $59 million (after-tax) for the three and six months ended June 30, 1994, respectively. Results in 1995 also reflected increased operating expenses in the health care business, as a result of the migration of customers from the traditional health care products to the more resource- intensive managed care business and the company's increased investment in managed care, and in the Aetna Life Insurance & Annuity segment as a result of continued business growth and costs associated with the implementation of a new contract administration system. Partially offsetting these increases in operating expenses are overall reductions due to actions taken by management in prior years to lower costs. Net Realized Capital Gains and Losses Net realized after-tax capital gains and losses included in net income, allocable to experience rated pension contractholders, and supporting discontinued products were as follows (in millions):
Three Months Ended June 30, Six Months Ended June 30, ___________________________ _________________________ 1995 1994 1995 1994 ____ ____ ____ ____ Net realized capital gains (losses) from sales................................. $ (19.2) $ 12.2 $ (22.1) $ 27.4 Realized capital gains (losses) from changes in reserves for mortgage loans and real estate...................... 6.7 (19.8) 2.6 (42.0) Realized capital losses from write-downs of debt and equity securities.............. - (.4) - (.9) _______ _______ _______ _______ Net realized capital losses from remaining products......................... $ (12.5) $ (8.0) $ (19.5) $ (15.5) _______ _______ _______ _______ _______ _______ _______ _______ Net realized capital gains (losses) allocable to experience rated pension contractholders (excluded above)........... $ 30.1 $ (37.7) $ 7.3 $ (71.6) _______ _______ _______ _______ _______ _______ _______ _______ Net realized capital gains (losses) on assets supporting discontinued products (excluded above).................. $ 1.2 $ (27.6) $ (5.6) $ (54.3) _______ _______ _______ _______ _______ _______ _______ _______
Net realized capital losses from sales for the three and six months ended June 30, 1995 include $23 million resulting from the write-down to estimated fair market value of the company's investment in a consolidated subsidiary, Aetna Re-Insurance Company (U.K.) Ltd., which it intends to sell. Net realized capital gains from sales for the six months ended June 30, 1994 include a $14 million gain resulting from the sale of a portion of an unconsolidated subsidiary. Strategic Outlook The company continues to review its Property-Casualty and other businesses and assess their potential for contribution to the company's long-term strategic and financial objectives. 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Health Plans __________________
Operating Summary (Millions) Three Months Ended June 30, Six Months Ended June 30, ________________________________ ______________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 1,461.8 $ 1,429.7 2.2% $ 2,956.5 $ 2,756.6 7.3% Net investment income............... 96.5 85.2 13.3 181.2 169.4 7.0 Fees and other income............... 336.1 299.6 12.2 643.6 597.8 7.7 Net realized capital gains (losses). (5.9) 1.4 - (10.1) (17.4) 42.0 _________ _________ _________ _________ Total revenue.................... 1,888.5 1,815.9 4.0 3,771.2 3,506.4 7.6 Current and future benefits......... 1,273.1 1,202.8 5.8 2,546.4 2,311.9 10.1 Operating expenses.................. 498.9 457.1 9.1 983.9 908.8 8.3 Amortization of deferred policy acquisition costs.................. 6.4 7.3 (12.3) 13.2 14.7 (10.2) _________ _________ _________ _________ Total benefits and expenses...... 1,778.4 1,667.2 6.7 3,543.5 3,235.4 9.5 _________ _________ _________ _________ Income before income taxes.......... 110.1 148.7 (26.0) 227.7 271.0 (16.0) Income taxes........................ 40.6 54.7 (25.8) 84.6 99.6 (15.1) _________ _________ _________ _________ Net income.......................... $ 69.5 $ 94.0 (26.1) $ 143.1 $ 171.4 (16.5) _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ (3.5) $ .8 - $ (6.3) $ (11.2) 43.8 _________ _________ _________ _________ _________ _________ _________ _________ Self-funded benefit payments administered for customers other than Medicare...................... $ 3,204.9 $ 3,046.1 5.2 $ 6,412.9 $ 6,037.7 6.2 _________ _________ _________ _________ _________ _________ _________ _________ Benefit payments administered for Medicare........................... $ 3,462.1 $ 3,267.6 6.0 $ 6,912.6 $ 6,517.3 6.1 _________ _________ _________ _________ _________ _________ _________ _________
Aetna Health Plans' net income for the three and six months ended June 30, 1995 decreased by $25 million and $28 million, respectively, compared with the same periods a year ago. Excluding net realized capital gains and losses, results for the three and six months ended June 30, 1995 decreased $20 million and $33 million, respectively, from the prior year. Second quarter and year-to-date 1995 results reflected unfavorable medical claim experience (included in current and future benefits) reflecting an increase in medical trend (utilization and costs of medical care) in indemnity and preferred provider lines of business and increased operating expenses. The growth in operating expenses is primarily attributable to the migration of customers from the traditional health care products to the more resource-intensive managed care business, investments in managed care-related systems and the development of primary care physician practices. These increased expenses are consistent with the company's continued focus on a strategy for investing in managed care. In addition, year-to-date results in 1994 included $8 million (after-tax) of non-recurring benefits from the settlement of a lawsuit and the termination of an HMO management contract. 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Health Plans (Continued) ______________________________ Premiums and fees and other income increased 4% and 7% during the three and six months ended June 30, 1995 compared with the same periods in 1994, primarily resulting from growth in covered members, price increases and a movement toward higher revenue products, such as point-of-service and health maintenance organizations. The number of members covered under health care arrangements was 15.7 million and 15.6 million at June 30, 1995 and December 31, 1994, respectively. The number of managed care members was 7.8 million and 7.0 million at June 30, 1995 and December 31, 1994, respectively. Included in the number of members at June 30, 1995 and December 31, 1994 were approximately .7 million members covered under a contract with the Civilian Health and Military Program of the Uniformed Services ("Champus"). Champus has awarded renewal of the contract to another provider and the company has filed a protest with the General Accounting Office concerning the process by which the contract was awarded. Even if loss of the contract occurs, the company would remain the primary provider until 1996. 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Life Insurance & Annuity ______________________________
Operating Summary (Millions) Three Months Ended June 30, Six Months Ended June 30, __________________________________ __________________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 49.6 $ 38.7 28.2% $ 92.0 $ 74.7 23.2% Net investment income............... 258.1 240.2 7.5 503.6 480.6 4.8 Fees and other income............... 87.1 78.0 11.7 171.1 156.4 9.4 Net realized capital gains (losses). 6.2 (1.7) - 9.2 (4.7) - _________ _________ _________ _________ Total revenue.................... 401.0 355.2 12.9 775.9 707.0 9.7 Current and future benefits......... 248.9 227.2 9.6 478.0 446.7 7.0 Operating expenses.................. 73.6 59.7 23.3 143.7 119.2 20.6 Amortization of deferred policy acquisition costs.................. 9.5 6.4 48.4 21.0 20.5 2.4 _________ _________ _________ _________ Total benefits and expenses...... 332.0 293.3 13.2 642.7 586.4 9.6 _________ _________ _________ _________ Income before income taxes.......... 69.0 61.9 11.5 133.2 120.6 10.4 Income taxes........................ 22.5 20.6 9.2 43.2 39.8 8.5 _________ _________ _________ _________ Net income.......................... $ 46.5 $ 41.3 12.6 $ 90.0 $ 80.8 11.4 _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ 4.1 $ (1.0) - $ 6.0 $ (3.0) - _________ _________ _________ _________ _________ _________ _________ _________ Deposits not included in premiums above (1).......................... $ 929.1 $ 828.3 12.2 $ 1,850.2 $ 1,670.1 10.8 _________ _________ _________ _________ _________ _________ _________ _________ (1) Under Financial Accounting Standard No. 97, certain deposits are not included in premiums or revenue.
Aetna Life Insurance & Annuity's net income for the three and six months ended June 30, 1995 increased $5 million and $9 million, respectively, from the same periods a year ago. Excluding net realized capital gains and losses, results for the three and six months ended June 30, 1995 remained level compared with the same periods a year ago. Second quarter and year-to-date results in 1995 reflected an increase in fees assessed against policyholders and increased net investment income related to the growth in assets under management offset by an increase in operating expenses. The increase in operating expenses primarily reflects continued business growth and costs associated with the implementation of a new contract administration system. Assets under management were $23.1 billion and $18.8 billion, at June 30, 1995 and 1994, respectively. Included in assets under management are net unrealized capital gains of $570 million and unrealized capital losses of $120 million at June 30, 1995 and 1994, respectively. 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions ___________________
Operating Summary (Millions) Three Months Ended June 30, Six Months Ended June 30, ________________________________ ______________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Premiums........................... $ 58.8 $ 43.3 35.8% $ 183.2 $ 100.2 82.8% Net investment income.............. 477.3 509.7 (6.4) 945.5 1,014.7 (6.8) Fees and other income.............. 33.0 31.2 5.8 68.1 63.3 7.6 Net realized capital gains (losses) 13.6 (4.5) - 5.9 (14.0) - _________ _________ _________ _________ Total revenue................... 582.7 579.7 .5 1,202.7 1,164.2 3.3 Current and future benefits........ 519.2 543.8 (4.5) 1,100.3 1,098.4 .2 Operating expenses................. 22.5 21.6 4.2 43.1 44.4 (2.9) _________ _________ _________ _________ Total benefits and expenses..... 541.7 565.4 (4.2) 1,143.4 1,142.8 .1 _________ _________ _________ _________ Income before income taxes......... 41.0 14.3 186.7 59.3 21.4 177.1 Income taxes....................... 12.3 2.9 - 19.3 3.4 - _________ _________ _________ _________ Net income......................... $ 28.7 $ 11.4 151.8 $ 40.0 $ 18.0 122.2 _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)...... $ 8.8 $ (2.9) - $ 3.8 $ (8.9) - _________ _________ _________ _________ _________ _________ _________ _________ Deposits not included in premiums above (1)........................ $ 482.7 $ 464.5 3.9 $ 909.7 $ 1,117.8 (18.6) _________ _________ _________ _________ _________ _________ _________ _________ (1) Under Financial Accounting Standard No. 97, certain deposits are not included in premiums or revenue.
Large Case Pensions' net income for the three and six months ended June 30, 1995 increased by $17 million and $22 million, respectively, compared with the same periods a year ago. Excluding net realized capital gains and losses, results for the three and six months ended June 30, 1995 increased $6 million and $9 million, respectively, from the prior year. Results for the three and six months ended June 30, 1995 primarily reflected an increase in fees and other income and in net interest margins. The increase in year-to-date 1995 premiums primarily related to additional premiums from existing contractholders and did not have a material effect on results. Assets under management were $46.9 billion and $48.6 billion, at June 30, 1995 and 1994, respectively. Included in assets under management are net unrealized capital gains of $391 million and net unrealized capital losses of $277 million at June 30, 1995 and 1994, respectively. 28 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ Experience rated contractholder and participant withdrawals and transfers were as follows (excluding contractholder transfers to other company products) (in millions):
Three Months Ended June 30, Six Months Ended June 30, ____________________________ __________________________ 1995 1994 1995 1994 ____ ____ ____ ____ Scheduled contract maturities and benefit payments: (1)......... $ 235.7 $ 261.6 $ 506.0 $ 501.9 ________ ________ ________ ________ ________ ________ ________ ________ Contractholder withdrawals other than scheduled contract maturities and benefit payments.............. $ 91.0 $ 152.3 $ 188.6 $ 312.0 ________ ________ ________ ________ ________ ________ ________ ________ Participant withdrawals............ $ 43.1 $ 46.9 $ 97.6 $ 108.6 ________ ________ ________ ________ ________ ________ ________ ________ (1) Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules.
The company is exploring sale or other alternatives for certain portions of its large case pension investment management and advisory business conducted through its subsidiary, Aeltus Investment Management, but is no longer considering selling this subsidiary. Such business contributed $4 million and $7 million to Large Case Pensions' net income for the three and six months ended June 30, 1995, respectively, as compared to $3 million and $8 million for the same periods a year ago. Discontinued Products Results of discontinued fully guaranteed large case pension products (guaranteed investment contracts ("GICs") and single- premium annuities ("SPAs")) for the three and six months ended June 30, 1995 and 1994 were charged to the reserve for anticipated future losses and did not affect the company's results of operations. Future losses (including capital losses) for each product will be charged to the respective reserve at the time such losses are realized. Management believes the reserve for anticipated losses at June 30, 1995 is adequate to provide for future losses associated with these products. To the extent that actual future losses differ from anticipated future losses, the company's results of operations would be affected. (Please refer to the company's 1994 Annual Report to Shareholders for a more complete discussion of the reserve for anticipated future losses on discontinued products.) At the time of discontinuance, a receivable from continuing products was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables will be funded from invested assets supporting Large Case Pensions and accrue interest at the discount rates used to calculate the loss on discontinuance until the receivable is funded. The offsetting payable established in continuing products will similarly accrue interest, generally offsetting the investment income on the assets available to fund the shortfalls. At June 30, 1995, the receivables from continuing operations were $420 million and $478 million for GICs and SPAs, respectively, and no funding had taken place. 29 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ Results of discontinued products were as follows (in millions):
Three Months Ended June 30, 1995 Six Months Ended June 30, 1995 ________________________________ ______________________________ GICs SPAs Total GICs SPAs Total ____ ____ ________ ____ ____ ________ Negative interest margin (1).......... $ (4.4) $ (.6) $ (5.0) $ (19.3) $ (3.4) $ (22.7) Net realized capital gains (losses)... (8.2) 9.4 1.2 (20.2) 14.6 (5.6) Interest earned on receivable from continuing operations............... 3.3 4.9 8.2 6.6 9.9 16.5 Other, net............................ (.4) .1 (.3) .7 1.7 2.4 ________ ________ ________ ________ ________ ________ Results of discontinued products, after-tax........................... $ (9.7) $ 13.8 $ 4.1 $ (32.2) $ 22.8 $ (9.4) ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax............................... $ (13.8) $ 20.0 $ 6.2 $ (47.3) $ 32.8 $ (14.5) ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Net realized capital gains (losses) from sales of bonds, after-tax, included above....................... $ (3.3) $ 13.7 $ 10.4 $ (9.0) $ 23.1 $ 14.1 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Three Months Ended June 30, 1994 Six Months Ended June 30, 1994 ________________________________ ______________________________ GICs SPAs Total GICs SPAs Total ____ ____ ________ ____ ____ ________ Negative interest margin (1).......... $ (21.9) $ (.1) $ (22.0) $ (42.4) $ (2.2) $ (44.6) Net realized capital losses........... (20.5) (7.1) (27.6) (37.1) (17.2) (54.3) Interest earned on receivable from continuing operations............... 3.1 4.5 7.6 6.2 9.0 15.2 Other, net............................ 2.8 4.0 6.8 3.4 5.1 8.5 ________ ________ ________ ________ ________ ________ Results of discontinued products, after-tax........................... $ (36.5) $ 1.3 $ (35.2) $ (69.9) $ (5.3) $ (75.2) ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax.............................. $ (57.0) $ (1.3) $ (58.3) $ (108.4) $ (11.5) $ (119.9) ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Net realized capital losses from sales of bonds, after-tax, included above....................... $ (18.8) $ (4.4) $ (23.2) $ (8.7) $ (8.2) $ (16.9) ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ (1) Represents the amount by which interest credited to holders of fully guaranteed large case pension contracts exceeds interest earned on invested assets supporting such contracts.
The activity in the reserve for anticipated future losses on discontinued products was as follows (pretax, in millions):
Six Months Ended June 30, 1995 ________________________________ GICs SPAs Total ____ ____ _____ Reserve at December 31, 1994...... $ 345.6 $ 651.4 $ 997.0 Results of discontinued products.. (47.3) 32.8 (14.5) ________ ________ ________ Reserve at June 30, 1995.......... $ 298.3 $ 684.2 $ 982.5 ________ ________ ________ ________ ________ ________
30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ At June 30, 1995 and December 31, 1994, estimated future after-tax capital losses of $116 million and $127 million ($179 million and $196 million, pretax), respectively, attributable primarily to mortgage loans and real estate supporting GICs, and $39 million and $47 million ($60 million and $73 million, pretax), respectively, attributable primarily to mortgage loans and real estate supporting SPAs were expected to be charged to the reserve for future losses. Distributions on GICs and SPAs were as follows (in millions):
Three Months Ended June 30, 1995 Six Months Ended June 30, 1995 ________________________________ ________________________________ GICs SPAs Total GICs SPAs Total ____ ____ ________ ____ ____ ________ Scheduled contract maturities, GIC settlements and benefit payments (1)...................... $ 614.5 $ 128.5 $ 743.0 $1,259.3 $ 262.2 $1,521.5 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 22.2 $ - $ 22.2 $ 49.3 $ - $ 49.3 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Three Months Ended June 30, 1994 Six Months Ended June 30, 1994 ________________________________ ________________________________ GICs SPAs Total GICs SPAs Total ____ ____ ________ ____ ____ ________ Scheduled contract maturities and benefit payments (1).......... $ 520.7 $ 132.4 $ 653.1 $1,083.7 $ 264.0 $1,347.7 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 52.1 $ - $ 52.1 $ 126.1 $ - $ 126.1 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ (1) Includes payments made upon contract maturity, early settlement of GIC liabilities in 1995 and other amounts distributed in accordance with contract schedules.
Cash required to meet the above payments was provided by earnings on, sales of, and scheduled payments on, invested assets. (Please see "General Account Investments" on page 39 for a discussion of investments supporting discontinued products.) 31 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Property-Casualty _________________
Operating Summary (Millions) Three Months Ended June 30, Six Months Ended June 30, __________________________________ __________________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 1,003.2 $ 1,093.5 (8.3)% $ 2,050.1 $ 2,211.4 (7.3)% Net investment income............... 221.1 205.3 7.7 437.0 421.9 3.6 Fees and other income............... 20.4 32.7 (37.6) 43.0 62.5 (31.2) Net realized capital gains (losses). (41.8) (7.5) - (35.0) 16.2 - _________ _________ _________ _________ Total revenue.................... 1,202.9 1,324.0 (9.1) 2,495.1 2,712.0 (8.0) Current and future benefits......... 1,506.8 927.4 62.5 2,348.9 1,966.2 19.5 Operating expenses.................. 196.2 221.2 (11.3) 394.7 474.2 (16.8) Amortization of deferred policy acquisition costs.................. 160.4 157.0 2.2 315.5 315.9 (.1) _________ _________ _________ _________ Total benefits and expenses...... 1,863.4 1,305.6 42.7 3,059.1 2,756.3 11.0 _________ _________ _________ _________ Income (loss) before income taxes... (660.5) 18.4 - (564.0) (44.3) - Income tax benefits................. (242.5) (1.6) - (214.4) (38.1) - _________ _________ _________ _________ Net income (loss)................... $ (418.0) $ 20.0 - $ (349.6) $ (6.2) - _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ (21.9) $ (7.7) (184.4) $ (18.3) $ 8.7 - _________ _________ _________ _________ _________ _________ _________ _________ Statutory combined loss and expense ratio...................... 184.4% 119.7% - 147.1% 125.0% - _________ _________ _________ _________ _________ _________ _________ _________ Statutory combined loss and expense ratio (1).................. 110.0% 108.7% - 109.3% 118.1% - _________ _________ _________ _________ _________ _________ _________ _________ GAAP combined loss and expense ratio.............................. 182.2% 116.8% - 146.9% 122.7% - _________ _________ _________ _________ _________ _________ _________ _________ GAAP combined loss and expense ratio (1).......................... 107.8% 105.8% - 109.0% 115.8% - _________ _________ _________ _________ _________ _________ _________ _________ Catastrophe loss ratio (included in combined ratios above) 3.9% 4.2% - 2.8% 10.2% - _________ _________ _________ _________ _________ _________ _________ _________ (1) Excludes the effect of additions to environmental-related claims reserves.
Property-Casualty's earnings (after-tax) adjusted for additions to environmental-related claims reserves and net realized capital gains and losses follow (in millions):
Three Months Ended June 30, Six Months Ended June 30, ___________________________ _________________________ 1995 1994 1995 1994 ____ ____ ____ ____ Net income (loss)............................ $(418.0) $ 20.0 $(349.6) $ (6.2) Less: Additions to environmental-related claims reserves......................... (487.5) (76.8) (505.7) (97.6) Net realized capital gains (losses)....... (21.9) (7.7) (18.3) 8.7 _______ _______ _______ _______ Adjusted earnings............................ $ 91.4 $ 104.5 $ 174.4 $ 82.7 _______ _______ _______ _______ _______ _______ _______ _______
32 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Property-Casualty (Continued) _____________________________ Property-Casualty's adjusted earnings decreased $13 million and increased $92 million for the three and six months ended June 30, 1995, as compared with the same periods in 1994. The following significant factors impact the comparison of adjusted earnings: Catastrophe losses (after-tax and net of reinsurance) for the three and six months ended June 30, 1995 were $25 million and $38 million ($90 million and $117 million pretax and before reinsurance), respectively, compared with $29 million and $153 million ($85 million and $387 million pretax and before reinsurance), respectively, for the same periods a year ago. Catastrophe losses for the six months ended June 30, 1994 included $149 million ($383 million pretax and before reinsurance) from the Los Angeles earthquake and the severe winter weather. Reductions of prior year loss reserves in the personal auto business of $54 million and $59 million (after-tax) for the three and six months ended June 30, 1994, respectively. Results in 1995 also reflected a reduction in operating expenses, primarily due to actions taken by management in prior years to lower costs, a reduction in losses due to the transfer of additional risk through restructured and expanded reinsurance programs (discussed below) and higher net investment income. Premium revenue for the three and six months ended June 30, 1995 was approximately 8 percent and 7 percent, respectively, lower than in the same periods a year ago, due primarily to the transferring of additional risk through restructured and expanded reinsurance programs, and reductions in residual market business assumed as a result of exiting certain markets. Net realized capital losses (after-tax) for the three and six months ended June 30, 1995 include $23 million resulting from the write-down to estimated fair market value of the company's investment in a consolidated subsidiary, Aetna Re-Insurance Company (U.K.) Ltd., which it intends to sell. Management continues to evaluate personal auto market conditions in each state and maintain or increase the company's presence in those states that offer acceptable returns and reduce its presence in those states where the company is unable to earn acceptable returns. The company renewed its principal property catastrophe reinsurance program in May 1995. It provides approximately 90% coverage of specified property losses between $150 million and $325 million. (The company's prior property catastrophe reinsurance program provided 90% coverage of property losses between $150 million and $400 million.) Under this program, catastrophe losses outside of the levels specified are retained by the company. The company also has in place for 1995 an aggregate excess of loss arrangement with respect to all of its property-casualty lines for accident year 1995, providing up to approximately $250 million of additional net protection. For a discussion of additional reinsurance arrangements, see "Property-Casualty - Property- Casualty Reserves" on page 33. 33 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Property-Casualty (Continued) _____________________________ Property-Casualty Reserves Environmental-Related Claims Reserving for environmental-related claims is subject to significant uncertainties, and liabilities for these types of claims generally cannot be estimated using conventional actuarial reserving techniques. However, in recent years, particularly 1994 and 1995, developments have occurred inside and outside of the company which have enabled the company to continue to better estimate these liabilities. Reserves for environmental liabilities are evaluated by management regularly, and adjustments are made to reserves as developing loss patterns, reserving methodologies and other information appear to warrant. As described below, as a result of further developments, reserves for environmental-related claims were increased significantly in the second quarter of 1995. Background. ___________ The company has been a major writer of commercial insurance policies which are the types of policies alleged to cover hazardous waste clean-up costs. The company generally disputes that there is insurance coverage for environmental claims, and is vigorously litigating coverage and related issues that will ultimately determine, in many cases, whether and to what extent insurance coverage exists for environmental claims. Environmental claims, particularly large coverage disputes, are complex and subject to significant uncertainties in addition to the vagaries of and risks inherent in major litigation generally. First, the underlying liabilities of the claimants are difficult to estimate. At any given waste disposal site, the total amount of remediation cost is frequently difficult to estimate and the portion to be allocated to a potentially responsible party ("PRP") depends on a wide variety of factors, including volumetric contribution, relative toxicity, number of years active at the site, extent of impairment to the environment and ability of others to pay. A PRP may have no liability, may share responsibility with others or may bear the cost alone. Second, there are uncertainties relating to whether insurance policies will be found to cover PRP liabilities. For example, courts have reached inconsistent conclusions regarding scope of coverage issues such as: whether insurance coverage exists at all; what policies provide the coverage; whether an insurer has a duty to defend; whether an insured's environmental losses are caused by one or more "occurrences" for purposes of determining applicable policy limits; how pollution exclusions in policies should be applied; and whether cleanup costs are payable as "damages." 34 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Property-Casualty (Continued) _____________________________ Developments Leading up to the Company's Environmental Study. _____________________________________________________________ The company has continued to gather and analyze legal and factual information on environmental-related claims, and has continued to reassess its reserving techniques for these claims as developments have occurred over time. During 1994 and 1995, certain of the company's environmental claims in litigation matured and approached the trial stage, and the company obtained information that allowed it to estimate its exposure on certain of the claims involved in the litigation. Also, certain policyholders settled their environmental claims with the company in 1994 and 1995, including, in the first quarter of 1995, a policyholder that had presented the company with a particularly large claim for coverage. The maturing and settling of these claims, coupled with increasing expertise in handling environmental claims, also better enabled the company to understand the profile of its other environmental claims. Additionally, supplemental data bases and alternative methodologies were being developed by outside firms for possible use in estimating environmental liabilities. The Company's Environmental Study. __________________________________ The company initiated a comprehensive environmental reserving review in early 1995. The company dedicated substantial resources to this review in an effort to improve the company's ability to estimate its environmental-related liability. The review was concluded at the end of the second quarter of 1995. As part of its review, the company conducted an extensive search for available information about environmental claims, which included gathering, studying, and testing additional data obtained from various outside sources. Also, as part of this review, the company re-examined a variety of conventional actuarial reserving techniques to determine whether they could be used in estimating environmental liabilities, and it also examined the appropriateness of other developing techniques for possible use in estimating these liabilities. The company concluded that conventional actuarial reserving techniques were generally not useful in estimating environmental liabilities because of the uncertainties involved and the lack of sufficient historically- developed data; however, the company was able to develop a sophisticated methodology which, when used in conjunction with other methods and information available to it, assisted the company in estimating indemnity-related liabilities for all of its known environmental claims. 35 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Property-Casualty (Continued) _____________________________ This methodology (the "exposure methodology") is a detailed analysis that involves the estimation of indemnity-related liabilities for environmental claims from direct policies on a site-by-site, policyholder-by-policyholder basis, which differs from macro-based analyses which attempt to estimate a company's liability based on market share or other overall measurements. The exposure methodology depends heavily upon management's subjective judgment, in that it requires management to make numerous assumptions as to, among other things, estimated total clean-up costs for each site, allocation of site clean-up costs to particular policyholders under joint and several liability principles, resolution of unsettled coverage questions, and resolution of unsettled questions involving the allocation of losses to specific insurance policies. As all of the information necessary to estimate liability on a particular site frequently is not available, the exposure methodology also simulates data in such cases from available data. The company engaged an outside actuarial firm to assist it in reviewing the exposure methodology and certain significant assumptions used. The company also engaged an outside law firm to assist it in reviewing the principal legal coverage assumptions. Although the exposure methodology relies heavily upon management judgment and simulated data, the use of simulation models is an appropriate, accepted actuarial practice to estimate liabilities subject to significant uncertainties. In addition to estimating indemnity-related liabilities on known claims, as part of its reserving review the company also estimated losses for incurred but not reported environmental claims ("IBNR"), unallocated loss adjustment expenses ("ULAE") associated with environmental claims, and additional costs of expected future coverage litigation. The company's estimation of IBNR, ULAE and coverage litigation costs are based on a combination of historical data and various assumptions about the future, including assumptions regarding the number and severity of new environmental claims that will arise, and trends in the volume and cost of future litigation. The company also had the outside actuarial firm assist it in reviewing its methodology for estimating these types of environmental liabilities and certain significant assumptions made in doing so. Reserving Actions Taken Upon Completion of the Company's ________________________________________________________ Environmental Study. ____________________ Upon completing its reserving review, the company added $750 million (pretax) ($488 million, after-tax) to environmental- related claims reserves in the second quarter of 1995. While the company expects to recover some of its environmental losses from its reinsurers, due to the uncertainty in estimating amounts to be recovered, no reinsurance benefits were recorded in establishing this addition to reserves. This reserve addition reflects approximately $397 million (pretax) ($258 million, after-tax) for indemnity-related liabilities on known claims and approximately $353 million (pretax) ($230 million, after-tax) for IBNR, ULAE and additional coverage litigation costs. 36 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Property-Casualty (Continued) _____________________________ Following this reserve addition, the company's total reserve for environmental-related liabilities at June 30, 1995 was $1,187 million, before reduction for reinsurance of $100 million (net of an allowance of $16 million for reinsurance considered to be uncollectible) and net of discount on environmental settlements. This reserve consists of approximately $700 million for indemnity- related environmental liabilities for all of the company's known environmental claims. The remainder of the reserve represents IBNR, estimated coverage litigation costs, and ULAE. Conclusion. ___________ In the opinion of management, the company's reserves for environmental-related claims at June 30, 1995 represent the company's best estimate of its ultimate environmental-related liability, based on currently known facts, current law (including Superfund), current technology, and assumptions considered reasonable where facts are not known. Due to the significant uncertainties and related management judgment involved in estimating the company's environmental liability, no assurances can be given that the environmental reserve represents the amount that will ultimately be paid by the company for all environmental- related losses. The amount ultimately paid could differ materially from the company's currently recorded reserve as legal and factual issues are clarified, but any difference cannot be reasonably estimated at this time. In addition, the company has purchased reinsurance protection which could be available to reduce the statutory surplus effects of additional environmental reserve development. The reinsurance provides aggregate protection of $335 million for adverse loss development beyond reserves held (net of existing reinsurance) at June 30, 1995 for environmental, asbestos, certain general liability and workers' compensation claims, occurring prior to January 1, 1995 ($6.9 billion). Under this arrangement, $165 million of the existing reserves for such losses have been ceded. This is a retroactive contract and the earnings benefits of any future recoveries arising under this arrangement would be accounted for as such under FAS No. 113 (i.e., at a discounted value). Because of the length of time between the recording of any reinsurance recoverable and its ultimate payment, the initial benefit of any recovery could be substantially less than the amount of reserve development. Please see "Liquidity and Capital Resources" on page 47 for a discussion of the effects of the environmental-related reserve addition on the company's liquidity and capital resources. For a full discussion of property-casualty reserves, including environmental and asbestos-related reserves, please see Note 13 of Condensed Notes to Financial Statements, the company's Annual Report on Form 10-K for the year ended December 31, 1994, and the company's Form 10-Q for the quarter ended March 31, 1995. 37 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) International _____________
Operating Summary (Millions) Three Months Ended June 30, Six Months Ended June 30, __________________________________ __________________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 252.3 $ 233.8 7.9% $ 472.9 $ 438.4 7.9% Net investment income............... 87.1 79.3 9.8 155.4 156.6 (.8) Fees and other income............... 29.4 23.6 24.6 55.7 45.1 23.5 Net realized capital gains (losses). 2.1 (.8) - (1.7) 5.9 - _________ _________ _________ _________ Total revenue.................... 370.9 335.9 10.4 682.3 646.0 5.6 Current and future benefits......... 219.4 209.2 4.9 416.2 398.6 4.4 Operating expenses.................. 97.1 90.1 7.8 180.4 175.8 2.6 Amortization of deferred policy acquisition costs.................. 20.3 14.5 40.0 34.1 26.1 30.7 _________ _________ _________ _________ Total benefits and expenses...... 336.8 313.8 7.3 630.7 600.5 5.0 _________ _________ _________ _________ Income before income taxes.......... 34.1 22.1 54.3 51.6 45.5 13.4 Income taxes........................ 10.5 5.4 94.4 13.9 15.2 (8.6) _________ _________ _________ _________ Net income.......................... $ 23.6 $ 16.7 41.3 $ 37.7 $ 30.3 24.4 _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ .3 $ (.2) - $ (2.5) $ 2.8 - _________ _________ _________ _________ _________ _________ _________ _________
International's net income for the three and six months ended June 30, 1995 increased $7 million compared with the same periods a year ago. Excluding net realized capital gains and losses, results for the three and six months ended June 30, 1995 increased $6 million and $13 million, respectively, from the same periods a year ago. The improvement in results primarily reflected increased earnings in the Pacific Rim. During the third quarter of 1994, the company changed its accounting for its Korean affiliate from the consolidated basis of accounting to the equity basis of accounting. During the three and six months ended June 30, 1994, the company recognized revenue of $48 million and $98 million, respectively, and benefits and expenses of $48 million and $98 million, respectively, from the affiliate. During the first quarter of 1995, the company sold its interest in the affiliate at book value. During the first quarter of 1995, the company increased its ownership in several of its Chilean operating subsidiaries. The effects of this increased ownership are not expected to materially impact the results of the segment. 38 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Corporate _________
Operating Summary (Millions, after-tax) Three Months Ended June 30, Six Months Ended June 30, __________________________________ __________________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Interest expense............. $ 17.8 $ 14.2 25.4% $ 35.9 $ 27.6 30.1% Other expense................ 29.4 36.8 (20.1) 61.4 88.6 (30.7)
The increase in interest expense of $4 million and $8 million for the three and six months ended June 30, 1995 compared to the same periods a year ago resulted from the issuance by a subsidiary of $275 million of 9 1/2 % cumulative monthly income preferred securities in November 1994. Other expense for the six months ended June 30, 1995 included after-tax capital losses of $2 million. Net realized capital losses were less than $1 million for the three months ended June 30, 1995. Included in other expenses for the three and six months ended June 30, 1994 were after-tax capital gains of $3 million and after-tax capital losses of $4 million, respectively. Excluding realized capital gains and losses, the decrease in other expenses in 1995 resulted from a reduction of corporate staff area expenses associated with the company's 1994 restructuring. 39 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments ___________________________ The company's invested assets were comprised of the following, net of impairment reserves:
June 30, December 31, (Millions) 1995 1994 ____________________________________________________________________________ Debt securities: Held for investment, at amortized cost (fair value $1,823.8 and $1,991.2) $ 1,786.4 $ 2,000.8 Available for sale, at fair value (amortized cost $38,438.5 and $36,984.2) 39,583.4 35,110.7 Equity securities, at fair value (cost $1,152.8 and $1,326.9) 1,585.8 1,655.6 Short-term investments 520.2 450.4 Mortgage loans 10,802.6 11,843.6 Real estate 1,618.7 1,545.7 Policy loans 571.0 533.8 Other 1,215.2 1,152.7 __________________________________________________________________________ Total invested assets $ 57,683.3 $ 54,293.3 ________________________ ________________________
Please refer to the company's 1994 Annual Report to Shareholders for a description of the company's investment objectives and policies. The change in invested assets from December 31, 1994 to June 30, 1995 primarily reflected appreciation of debt securities due to a decrease in interest rates, partially offset by a decrease in mortgage loans. Debt securities included unrealized capital gains of $1.1 billion at June 30, 1995, compared with unrealized capital losses of $1.9 billion at December 31, 1994. Of such net unrealized capital gains at June 30, 1995, gains of $282 million and $541 million related to assets supporting discontinued products and experience rated pension contractholders, respectively. The decrease in mortgage loans principally reflected prepayments, payments at maturity on mortgage loans, foreclosures and the company's adoption of FAS Nos. 114 and 118 on January 1, 1995. The risks associated with investments supporting experience rated pension and annuity products are assumed by those customers subject to, among other things, certain minimum guarantees. The anticipated future losses associated with investments supporting discontinued products were provided for in the reserve on discontinuance of products. 40 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Debt Securities As of June 30, 1995 and December 31, 1994, the company's investments in debt securities represented 72% and 68%, respectively, of total general account invested assets and were as follows:
June 30, December 31, (Millions) 1995 1994 __________________________________________________________________________ Supporting discontinued products $ 6,120.7 $ 6,155.0 Supporting experience rated products 13,382.4 11,770.5 Supporting remaining products 21,866.7 19,186.0 ____________________________ Total $41,369.8 $37,111.5 ____________________________ ____________________________
Included in the company's total debt security balances were the following categories of debt securities:
(Millions) June 30, 1995 _______________________________________________________________________________________________________ "Below Investment "Problem" Debt "Potential Problem" Grade" Debt Securities Securities Debt Securities ______________________ ______________ ___________________ Total $1,693.7 $ 120.4 $ 119.0 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 30.4% 26.1% 45.4% Supporting experience rated products 33.2 19.2 31.8 Supporting remaining products 36.4 54.7 22.8 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ December 31, 1994 ________________________________________________________________ "Below Investment "Problem" Debt "Potential Problem" Grade" Debt Securities Securities Debt Securities ______________________ ______________ ___________________ Total $1,873.0 $ 146.4 $ 170.0 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 27.8% 35.6% 27.9% Supporting experience rated products 25.8 14.3 29.6 Supporting remaining products 46.4 50.1 42.5 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________
"Below investment grade" debt securities (which include "problem" debt securities and "potential problem" debt securities described below) are defined to be securities that carry a rating below BBB- /Baa3. Such debt securities have been written down for other than temporary declines in value. 41 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Management defines "problem" debt securities to be securities for which payment is in default, securities of issuers which are currently in bankruptcy or in out-of-court reorganizations, or securities of issuers for which bankruptcy or reorganization within six months is considered likely. "Potential problem" debt securities are currently performing debt securities for which neither payment default nor debt restructuring is anticipated within six months, but whose issuers are experiencing significant financial difficulties. Identifying such potential problem debt securities requires significant judgment as to likely future market conditions and developments specific to individual debt securities. The company does not accrue interest on problem debt securities when management believes the likelihood of collection of interest is doubtful. Lost investment income on problem debt securities was as follows:
Three Months Ended Six Months Ended June 30, June 30, __________________ __________________ (Millions) 1995 1994 1995 1994 ___________________________________________________________________________________ Allocable to discontinued products $ .4 $ 1.1 $ .8 $ 1.9 Allocable to experience rated products .4 .8 .6 1.3 Allocable to remaining products .7 .8 1.8 1.7
At June 30, 1995 and December 31, 1994, the carrying value (fair value) of collateralized mortgage obligations ("CMOs") was $3.5 billion and $3.4 billion, respectively. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates whereby the value of the CMOs would be subject to variability on the repayment of principal from the underlying mortgages earlier or later than originally anticipated. At June 30, 1995 and December 31, 1994, approximately 74% and 82%, respectively, of the company's CMO holdings consisted of sequential and planned amortization class ("PAC") bonds that are subject to less prepayment and extension risk than other CMO instruments. At June 30, 1995 and December 31, 1994, approximately 70% and 74%, respectively, of the company's CMO holdings were collateralized by residential mortgage loans, on which the timely payment of principal and interest is backed by specified government agencies (e.g., GNMA, FNMA, FHLMC). Z-tranches, which amounted to approximately 13% and 8% of the company's CMO holdings at June 30, 1995 and December 31, 1994, respectively, receive principal payments from the underlying mortgage pool only after all other priority classes have been retired. 42 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Mortgage Loans During the first six months of 1995, the mortgage loan portfolio was reduced 9% to $10.8 billion, net of impairment reserves. The company's mortgage loan investments, net of impairment reserves, supported the following types of business:
June 30, December 31, (Millions) 1995 1994 _______________________________________________________________________ Supporting discontinued products $ 4,025.8 $ 4,294.9 Supporting experience rated products 3,099.3 3,652.1 Supporting remaining products 3,677.5 3,896.6 _____________________________ Total $10,802.6 $11,843.6 _____________________________ _____________________________
During the first six months of 1995, the company continued to manage its mortgage loan portfolio to reduce the balance in absolute terms and relative to invested assets, and to reduce its overall risk. Mortgage loans, net of impairment reserves, now represent 19% of total general account invested assets, down from 38% in 1990. During this period, the principal balance of the mortgage portfolio was reduced by 50%. The principal balance of mortgage loans decreased $1 billion since December 31, 1994 primarily reflecting the effect of repayments of maturing loans and loan prepayments and foreclosures. During 1994, the company implemented a troubled debt restructuring program. The primary objective of this program is to restructure eligible loans in a manner which creates a market rate transaction which will perform in accordance with its restructured terms. The program is applied to those loans which have sound property and borrower fundamentals but possess excess debt. An important feature of these loans is that in exchange for principal forgiveness on a portion of the loan, the company typically retains the right to participate in property appreciation to the extent market conditions improve in the future. In those situations where the property fundamentals do not support a restructuring of the loan, the company generally acquires the collateral through foreclosure. Loans with a principal balance of $146 million and collateral with a fair market value of $119 million were foreclosed upon in the first six months of 1995. In certain cases, the company has taken substantive possession of the property supporting its loan, coupled with the borrower surrendering its interest in the future economic benefits in the property. Where this has occurred, the loans are considered in- substance foreclosures, written down to their fair market value less selling costs and classified as real estate held for sale. At June 30, 1995 and December 31, 1994, there were $177 million and $193 million, respectively, of in-substance foreclosures (net of write-offs of $138 million and $136 million, respectively). 43 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Included in the company's total mortgage loan balances were the following categories of mortgage loans:
(Millions) June 30, 1995 __________________________________________________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans* Total _____________ ____________ ______________ _____ Total $ 528.4 $ 655.3 $1,199.1 $2,382.8 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 20.8% 47.0% 46.9% Supporting experience rated products 35.0 26.2 28.1 Supporting remaining products 44.2 26.8 25.0 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Impairment reserves (1) $ 902.6** __________ __________ Impairment reserves as a percentage of total 37.9% _________ _________ December 31, 1994 ___________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans* Total _____________ ____________ ______________ _____ Total $ 673.1 $ 706.1 $ 918.7 $2,297.9 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 36.9% 39.1% 48.8% Supporting experience rated products 30.8 31.1 25.5 Supporting remaining products 32.3 29.8 25.7 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Impairment reserves (1) $ 784.1** __________ __________ Impairment reserves as a percentage of total 34.1% _________ _________ (1) Please see Note 6 of Condensed Notes to Financial Statements for composition of impairment reserves between specific and general impairment reserves. * In connection with the company's adoption of FAS Nos. 114 and 118 on January 1, 1995 (Please see Note 6 of Condensed Notes to Financial Statements), management has revised the definition of "potential problem loans". (Please see "potential problem loans" on page 44.) ** The general reserve at December 31, 1994 excluded reserves of approximately $208.5 million related to experience rated products. Had such reserves been included, total reserves would have been $992.6 million. In connection with the company's adoption of FAS Nos. 114 and 118, the general reserve at June 30, 1995 included such reserves, related to experience rated products. The inclusion of these reserves did not impact earnings or shareholders' equity.
"Problem loans" are defined to be loans with payments over 60 days past due, loans on properties in the process of foreclosure, loans on properties involved in bankruptcy proceedings and loans on properties subject to redemption. Loans on properties in the process of foreclosure decreased to $309 million at June 30, 1995 from $422 million at December 31, 1994. 44 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ "Restructured loans" are loans whose original contract terms have been modified to grant concessions to the borrower and are currently performing pursuant to such modified terms. Restructured loans that have a market rate of interest at the time of the restructure (which represents the interest rate the company would charge for a new loan with comparable risk) and demonstrate sustainable performance (as generally evidenced by six months of pre- or post-restructuring payment performance in accordance with the restructured terms) may be returned to performing status. (Please see the company's 1994 Annual Report to Shareholders for a complete description of the company's restructuring program.) No such restructures and transfers to performing status occurred during the six months ended June 30, 1995. In connection with the company's adoption of FAS Nos. 114 and 118 on January 1, 1995 (please see Note 6 of Condensed Notes to Financial Statements), management has revised the definition of "potential problem loans" to include all loans which are performing pursuant to existing terms and are considered likely to become classified as problem or restructured loans. Prior to January 1, 1995, "potential problem loans" were performing loans which management believed were likely to become classified as problem or restructured loans in the next 12 months or so. As a result of the revised definition, "potential problem loans" at June 30, 1995 are approximately $307 million higher than they would have been had the definition not been changed. "Potential problem loans" are identified through the portfolio review process on the basis of known information about the ability of borrowers to comply with present loan terms. Identifying such potential problem loans requires significant judgment as to likely future market conditions and developments specific to individual properties and borrowers. Provision for losses that management believes are likely to arise from such potential problem loans is included in the specific impairment reserves. (Please see Note 6 of Condensed Notes to Financial Statements for a discussion of mortgage loan impairment reserves.) 45 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ The company does not accrue interest on problem loans or restructured loans when management believes the collection of interest is unlikely. The amount of pretax investment income required by the original terms of such problem and restructured loans outstanding at June 30 and the portion thereof actually recorded as income were as follows:
Three Months Ended Six Months Ended June 30, June 30, __________________ __________________ (Millions) 1995 1994 1995 1994 _________________________________________________________________________________ Income which would have been recorded under original terms of loans $ 30.0 $ 65.7 $ 57.4 $ 139.6 Income recorded 16.9 28.0 28.6 62.1 _______ _______ _______ _______ Lost investment income $ 13.1 $ 37.7 $ 28.8 $ 77.5 _______ _______ _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting discontinued products (included above) $ 2.6 $ 20.7 $ 8.7 $ 37.4 _______ _______ _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting experience rated pension products (included above) $ 5.3 $ 6.6 $ 8.5 $ 19.4 _______ _______ _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting remaining products (included above) $ 5.2 $ 10.4 $ 11.6 $ 20.7 _______ _______ _______ _______ _______ _______ _______ _______
46 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Real Estate The company's equity real estate balances, net of write-downs and reserves, were as follows:
(Millions) June 30, 1995 ________________________________________________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total $ 398.2 $1,220.5 (1) $1,618.7 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 22.0% 50.3% Supporting experience rated products 6.9 21.5 Supporting remaining products 71.1 28.2 ________ ________ 100.0% 100.0% ________ ________ ________ ________ December 31, 1994 _________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total $ 382.3 $1,163.4 (1) $1,545.7 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 23.8% 54.9% Supporting experience rated products 8.3 21.6 Supporting remaining products 67.9 23.5 ________ ________ 100.0% 100.0% ________ ________ ________ ________ (1) Includes $176.9 million and $193.4 million of in-substance foreclosures at June 30, 1995 and December 31, 1994, respectively. (Please see "Mortgage Loans" on page 42 for discussion of in-substance foreclosures.)
All real estate acquired through foreclosure, including in- substance foreclosures, is classified as properties held for sale. These properties were carried at 62% and 60% of the company's cash investment (unpaid mortgage balance plus capital additions) at June 30, 1995 and December 31, 1994, respectively. Investment real estate, which is generally carried at depreciated cost, is written down to fair value to reflect other than temporary declines in market value. The fair value of assets acquired through foreclosure is established as the cost basis at the time of foreclosure. Subsequent to acquisition, properties classified as held for sale are carried at the lower of cost or fair value less estimated selling costs. Adjustments to the carrying value of properties held for sale resulting from changes in fair value, are recorded in a valuation reserve. Property valuations are reviewed regularly by investment management. Capital additions and asset improvements increase the cost basis of the asset while depreciation reduces the cost basis. 47 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Total real estate write-downs and valuation reserves on properties included in the company's equity real estate balances were as follows:
June 30, December 31, (Millions) 1995 1994 ______________________________________________________________________ Allocable to discontinued products $ 351.0 $ 376.0 Allocable to experience rated products 189.5 179.6 Allocable to remaining products 178.9 206.6 ________ ________ Total $ 719.4 $ 762.2 ________ ________ ________ ________
For the periods shown below, total after-tax net realized capital (gains) losses from real estate write-downs and changes in the valuation reserves were as follows:
Three Months Ended Six Months Ended June 30, June 30, ___________________ __________________ (Millions) 1995 1994 1995 1994 ____________________________________________________________________________________ Allocable to discontinued products (1) $ - $ 1.2 $ - $ 13.8 Allocable to experience rated products (2) - 4.5 - 4.6 Allocable to remaining products (10.8) (*) 1.2 (10.8) (*) (.4) (1) Write-downs and impairment expense allocable to discontinued products are charged against the reserve for future losses and do not affect the company's results of operations. (2) Write-downs and impairment expense allocable to experience rated products do not affect the company's results of operations. (*) Includes a $12.8 million realized capital gain related to the reversal of valuation reserves on a foreclosed property which appreciated in value.
Use of Derivatives and Other Investments The company's hedging activity has been limited and has principally consisted of using futures, forward contracts and interest rate swaps to hedge interest rate risk and currency risk. These instruments, viewed separately, subject the company to varying degrees of market and credit risk. However, when used for hedging, the expectation is that these instruments would reduce overall market risk. Market risk is the possibility that future changes in market prices may decrease the market value of one or all of these financial instruments. Credit risk arises from the potential inability of counterparties to perform under the terms of the contracts. Management does not believe that the current level of hedging activity will have a material effect on the company's liquidity or results of operations. (Please see Note 10 of Condensed Notes to Financial Statements for a discussion of the company's hedging activities.) 48 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ The company also had investments in certain debt instruments with derivative characteristics, including those where market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short term or long term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. The amortized cost and fair value of these securities, included in the $41.4 billion debt securities portfolio, as of June 30, 1995 was as follows:
Amortized Fair (Millions) Cost Value _____________________________________________________________________________ Collateralized mortgage obligations:............ $ 3,380.4 $ 3,507.0 Interest-only strips (included above)......... 17.3 33.9 Principal-only strips (included above)........ 53.1 66.6 Treasury and agency strips: Principal..................................... 1,037.0 1,049.8 Interest...................................... 102.0 98.0 Structured notes (1)............................ 95.0 100.5 Warrants to purchase debt securities (2)........ 2.8 3.1 Mandatorily convertible preferred stock......... 7.3 7.4 (1) Represents non-leveraged instruments whose fair values and credit risk are based on underlying securities, including fixed income securities and interest rate swap agreements. (2) Represents the right to purchase specific debt securities and is accounted for as a hedge. Upon exercise, the cost of the warrants will be added to the basis of the debt securities purchased and amortized over their lives.
49 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources _______________________________ As a result of the addition by the company of $750 million (pretax) ($488 million, after-tax) to the environmental-related claims reserves in the second quarter of 1995, the company intends to contribute additional capital to the company's property- casualty subsidiaries in order to restore capital levels (including risk-based capital), to appropriate levels for regulatory and other purposes, consistent with year-end 1994. Such infusion of capital is expected to be approximately $450 million and will be made by year-end 1995. The company currently expects to generate the funding for such capital contributions through parent company financing. Cash and cash equivalents at June 30, 1995 and December 31, 1994 were $2.2 billion and $3.0 billion, respectively. For the six months ended June 30, 1995, net cash provided by operating activities was $259 million. Net cash used for operating activities was $170 million during the first six months of 1994. For the first six months of 1995, net cash used for investing activities was $18 million and included a net increase in debt securities of $1.1 billion, offset by $937 million from maturities and repayments of mortgage loans. Net cash provided by investing activities of $1.0 billion for the six months ended June 30, 1994 included a net increase of $122 million in short-term investments. Short-term borrowings are used from time to time to provide for timing differences between receipts and disbursements in various portfolios. The maximum amount of domestic short-term borrowings outstanding during the first six months of 1995 was $185 million. The company has extended the maturity of, and adjusted interest rates to current market on, certain maturing mortgage loans where the borrower was unable to obtain financing elsewhere due to tight lending practices by banks and other financial institutions over the past several years. Of the $623 million of mortgage loans scheduled to mature during the first six months of 1995, $385 million were not paid as scheduled, a substantial portion of which supported large case pension liabilities. Of the loans not paid as scheduled, $104 million were extended at interest rates at least equal to current market (average rate of 9% over an average extension period of 5 years), $271 million were under forbearance (continuing to make payments under original loan terms) or under discussion with borrowers at June 30, 1995 and $10 million were foreclosed upon. Of the $271 million of loans under forbearance or under discussion with borrowers, $20 million were classified as problem or restructured loans at June 30, 1995. Despite various indications that liquidity is returning to certain real estate markets, the company expects it will continue to extend or refinance maturing loans in the portfolio. In July 1995, the company extended the maturity of its $500 million revolving credit facility which was scheduled to expire in July 1995. The extended maturity date of the facility is July 1996. (Please see Note 9 of Condensed Notes to Financial Statements.) In addition, the company has a $500 million credit facility which terminates in July 1999. 50 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources (Continued) ___________________________________________ Pursuant to shelf registration statements declared effective by the Securities and Exchange Commission, the company may offer and sell up to $550 million of various types of securities, and Aetna Capital L.L.C., a subsidiary of the company, may offer and sell up to an additional $225 million of preferred securities. Rating Agencies During 1995, ratings of Aetna Life and Casualty Company and certain of its subsidiaries were lowered by certain of the rating agencies. Aetna's ratings at February 7, 1995, as detailed in the 1994 Form 10-K, and at July 28, 1995 follow:
Rating Agencies ____________________________________________________________________ Moody's Investors Standard A.M. Best Duff & Phelps Service & Poor's ____________________________________________________________________ Aetna Life and Casualty Company (senior debt) February 7, 1995 * A+ A2 A+ July 28, 1995 * A A2 A- Aetna Life and Casualty Company (commercial paper) February 7, 1995 * Duff 1 P-1 A-1 July 28, 1995 * Duff 1 P-1 A-2 Aetna Life Insurance Company (claims paying) February 7, 1995 A AA (1) Aa3 A+ July 28, 1995 A AA- Aa3 A+ The Aetna Casualty and Surety Company (claims paying) February 7, 1995 A- AA- A1 A+ July 28, 1995 A- A+ A1 A Aetna Casualty and Surety Company of America (claims paying) February 7, 1995 A ** ** ** July 28, 1995 A ** ** ** Aetna Life Insurance and Annuity Company (claims paying) February 7, 1995 A++ AA+ Aa2 AA July 28, 1995 A+ AA+ Aa2 AA (1) On rating watch-down. * Not rated by the agency. ** Not rated on a separate company basis.
Dividends Declared On June 30, 1995, the Board of Directors declared a quarterly dividend of $.69 per share of common capital stock for shareholders of record at the close of business on July 28, 1995, payable August 15, 1995. 51 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Other Matters _____________ Income Taxes Net unrealized capital gains and losses are presented in shareholders' equity net of deferred taxes. During the six months ended June 30, 1995, the company moved from a net unrealized capital loss position of $1,072 million at December 31, 1994 to a net unrealized capital gain position of $345 million at June 30, 1995, primarily due to decreases in interest rates. As a result, all valuation allowances previously established related to deferred tax assets on these capital losses were reversed, which had no impact on net income for the three and six months ended June 30, 1995. Severance and Facilities Charges During the three and six months ended June 30, 1995, the company charged costs of $18 million and $57 million, respectively, to the severance and facilities reserve established in 1993 related to cost reduction actions. Substantially all of the approximately 4,000 positions expected to be eliminated had been completed by June 30, 1995 and the related severance benefits charged against the reserve. In addition, substantially all of the annualized after-tax savings of approximately $200 million related to these and other cost reduction actions have been realized as of June 30, 1995. The remaining cost reduction actions and related savings are expected in the second half of 1995. New Accounting Pronouncements _____________________________ Please see Note 2 of Condensed Notes to Financial Statements for a discussion of recently issued accounting pronouncements. 52 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The company is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against itself, including lawsuits related to issues of policy coverage and judicial interpretation. One such area of coverage litigation involves legal liability for environmental and asbestos-related claims. These lawsuits and other factors make reserving for these claims subject to significant uncertainties. While the ultimate outcome of such litigation cannot be determined at this time, such litigation net of reserves established therefore and giving effect to reinsurance probable of recovery, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. Item 4. Submission of Matters to a Vote of Security Holders. (a) The Annual Meeting of Shareholders of Aetna Life and Casualty Company was held on Friday, April 28, 1995. (b) Directors elected at the Meeting:
Votes Votes Broker For Withheld Non-Votes _____ ________ _________ Wallace Barnes 101,622,820 1,223,536 0 Ronald E. Compton 101,266,603 1,579,753 0 William H. Donaldson 101,849,827 996,529 0 Barbara H. Franklin 101,671,355 1,175,001 0 Earl G. Graves 101,820,418 1,025,938 0 Gerald Greenwald 97,329,053 5,517,303 0 Ellen M. Hancock 101,809,397 1,036,959 0 Michael H. Jordan 101,677,732 1,168,624 0 Jack D. Kuehler 101,844,737 1,001,619 0 Frank R. O'Keefe, Jr. 101,868,149 978,207 0
(c) Other matters voted upon:
Votes Votes Broker For Against Abstain Non-Votes _____ _______ _______ _________ (1) Appointment of Independent Auditors 101,839,916 672,598 333,842 0
53 Item 5. Other Information. (a) Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends The following table sets forth the company's ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the periods indicated.
Six Months Ended Years ended December 31 _____________________________________ June 30, 1995 1994 1993 1992 1991 1990 _________________ ____ ____ ____ ____ ____ Ratio of Earnings to Fixed Charges.... (a) 4.60 (b) .42(c) 2.13 3.03 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (a) 4.60 (b) .42(c) 2.13 3.03 (a) The company reported a pretax loss from continuing operations for the six months ended June 30, 1995 which was inadequate to cover fixed charges by $229.3 million. (b) The company reported a pretax loss from continuing operations in 1993 which was inadequate to cover fixed charges by $1.1 billion. (c) Earnings were inadequate to cover fixed charges by $112.8 million in 1992.
For purposes of computing both the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends, "earnings" represent consolidated earnings from continuing operations before income taxes, cumulative effect adjustments and extraordinary items plus fixed charges and minority interest. "Fixed charges" consist of interest (and the portion of rental expense deemed representative of the interest factor) and includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the company's 1994 Annual Report to Shareholders.) For the six months ended June 30, 1995 and for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 there was no preferred stock outstanding. As a result, the ratios of earnings to combined fixed charges and preferred stock dividends were the same as the ratios of earnings to fixed charges. 54 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (10) Material Contracts. (10.1) Extension Notice, dated July 17, 1995, of $500,000,000 Short-Term Credit Agreement dated July 27, 1994 among Aetna Life and Casualty Company, the banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger, and Morgan Guaranty Trust Company of New York, as Managing Agent. (12) Statement Re Computation of Ratios. (12.1) Computation of ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the six months ended June 30, 1995 and for the years ended December 31, 1994, 1993, 1992, 1991 and 1990. (15) Letter Re Unaudited Interim Financial Information. (15.1) Letter from KPMG Peat Marwick LLP acknowledging awareness of the use of a report on unaudited interim financial information, dated July 28, 1995. (27) Financial Data Schedule. (b) Reports on Form 8-K None. 55 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Aetna Life and Casualty Company _______________________________ (Registrant) Date July 28, 1995 By /s/ ROBERT J. PRICE _____________________________________ (Signature) Robert J. Price Vice President and Corporate Controller (Chief Accounting Officer) EX-10 2 MATERIAL CONTRACTS EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Morgan Guaranty Trust Co. of New York _________________________________________ By: /s/ Jerry J. Fall _________________________________________ Title: Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Deutsche Bank AG ___________________________________________ By: /s/ David E. Moyer /s/ Gayma Z. Shivnarain ___________________________________________ Title: Vice President Vice President ___________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: The Chase Manhattan Bank NA _________________________________________ By: /s/ Candace R. Lau-Hansen _________________________________________ Title: Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Citibank N.A. _________________________________________ By: /s/ Scott F. Engle _________________________________________ Title: Attorney-In-Fact _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Credit Suisse _________________________________________________ By: /s/ Juerg Johner /s/ Michael C. Mast _________________________________________________ Title: Associate Member of Senior Management _________________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Bank of America _________________________________________ By: /s/ Colleen P. Mullins _________________________________________ Title: Managing Director _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: First National Bank of Chicago _________________________________________ By: /s/ Thomas J. Collimore _________________________________________ Title: Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Fleet Bank, N.A. _________________________________________ By: /s/ Jan-Gee W. McCollam _________________________________________ Title: Sr. Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Mellon Bank, N.A. _________________________________________ By: /s/ Karen E. McConomy _________________________________________ Title: Banking Officer _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Nations Bank _________________________________________ By: /s/ Frank R. Callison _________________________________________ Title: Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Shawmut Bank _________________________________________ By: /s/ Jeffrey A. Simpson _________________________________________ Title: Assistant Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Toronto Dominion Bank _________________________________________ By: /s/ W. Reg Waylen _________________________________________ Title: Managing Director _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Chemical Bank _________________________________________ By: /s/ Peter W. Platten _________________________________________ Title: Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: CoreStates Bank, NA _________________________________________ By: /s/ Tom Singleton _________________________________________ Title: Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Credit Lyonnais New York _________________________________________ By: /s/ Renaud D'Herbes _________________________________________ Title: First Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: The Dai-Ichi Kangyo Bank, Ltd., New York Branch _______________________________________________ By: /s/ Kim P. Leary _________________________________________ Title: Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: First Interstate Bank of California _________________________________________ By: /s/ Thomas J. Helotes _________________________________________ Title: Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: First National Bank of Boston _________________________________________ By: /s/ Charles A. Garrity _________________________________________ Title: V.P. _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: The Northern Trust Co. _________________________________________ By: /s/ Dean V. Banick _________________________________________ Title: Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: State Street Bank and Trust Company _________________________________________ By: /s/ Robert P. Engvall, Jr. _________________________________________ Title: Vice President _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: The Sumitomo Bank, Limited _________________________________________ By: /s/ Shuntaro Higashi _________________________________________ Title: Joint General Manager _________________________________________ EXTENSION NOTICE - April 24, 1995 _________________________________ To the Banks party to the Credit Agreement referred to below: c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein, Deutsche Bank AG, as Co-Arranger and Morgan Guaranty Trust Company of New York, as Managing Agent, be extended pursuant to Section 2.16 of the Credit Agreement. The Extension Date is July 17, 1995 and the Extended Maturity Date is July 15, 1996. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided ________ that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By /s/ Robert E. Broatch ___________________________________ Robert E. Broatch Senior Vice President - Finance The undersigned Bank is willing to extend its Commitment as specified above: Name of Bank: Wachovia Bank of Georgia _________________________________________ By: /s/ Jeffrey S. Nurkiewicz _________________________________________ Title: Commercial Banking Officer _________________________________________ EX-12 3 STATEMENT RE COMPUTATION OF RATIOS 1 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Six Months Ended Years Ended December 31, ________________ _________________________________________________________ (Millions) June 30, 1995 1994 1993 1992 1991 1990 ________________ ____ ____ ____ ____ ________ Pretax income (loss) from continuing operations........... $ (239.0) $ 658.3 $(1,147.4) $ (121.4) $ 243.5 $ 459.6 Add back fixed charges............ 100.0 186.1 171.0 194.3 221.5 229.0 Minority interest................ 9.7 11.4 7.0 8.6 5.9 4.9 ________ _________ _________ ________ ________ ________ Income (loss) as adjusted..... $ (129.3) $ 855.8 $ (969.4) $ 81.5 $ 470.9 $ 693.5 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ Fixed charges: Interest on indebtedness....... $ 58.5(1) $ 98.6(1) $ 77.4 $ 81.4 $ 110.9 $ 119.9 Portion of rents representative of interest factor............ 41.5 87.5 93.6 112.9 110.6 109.1 ________ _________ _________ ________ ________ ________ Total fixed charges........... $ 100.0 $ 186.1 $ 171.0 $ 194.3 $ 221.5 $ 229.0 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ Preferred stock dividend requirements.................... - - - - - - ________ _________ _________ ________ ________ ________ Total combined fixed charges and preferred stock dividend requirements.................... $ 100.0 $ 186.1 $ 171.0 $ 194.3 $ 221.5 $ 229.0 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ Ratio of earnings to fixed charges......................... (1.29) 4.60 (5.67) 0.42 2.13 3.03 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ Ratio of earnings to combined fixed charges and preferred stock dividends................. (1.29) 4.60 (5.67) 0.42 2.13 3.03 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ (1) Includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the company's 1994 Annual Report to Shareholders.)
EX-15 4 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION 1 Letter Re: Unaudited Interim Financial Information ___________________________________________________ Aetna Life and Casualty Company Hartford, Connecticut Gentlemen: Re: Registration Statements No. 2-73911, 2-91514, 33-12993, 33-49543, 33-50427, 33-52819 and 33-52819-01 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated July 27, 1995 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. By /s/ KPMG PEAT MARWICK LLP _____________________________ (Signature) KPMG Peat Marwick LLP Hartford, Connecticut July 28, 1995 EX-27 5 ARTICLE 7 - FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the financial statements contained in the Form 10-Q for the quarterly period ended June 30, 1995 for Aetna Life and Casualty Company and is qualified in its entirety by reference to such statements. 1,000,000 6-MOS DEC-31-1995 JUN-30-1995 39,583 1,786 1,824 1,586 10,803 1,619 57,683 2,151 5,307 2,127 99,869 17,803 1,641 18,243 23,875 1,118 1,416 0 0 5,237 99,869 5,755 2,227 (32) 983 6,890 384 0 (239) (103) (136) 0 0 0 (136) (1.20) 0 0 0 0 0 0 0 0 There is not a significant difference between primary and fully diluted earnings per share.
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